KARACHI, Nov 24: The State Bank on Wednesday raised yields on three-month and one-year treasury bills by more than half a percentage point to signal to the market that it was ready to tighten the interest rates aggressively to contain soaring inflation.

The central bank raised the weighted average yield on three-month bills to 3.78 per cent from its previous level of 3.22 per cent and sold Rs26 billion bills at this price. The SBP also raised the weighted average yield on one-year bills to 4.43 per cent from its past level of 3.84 per cent and sold Rs300 million bills.

Senior bankers say a 56-basis point increase in the three-month yield and a 59bps increase in the one-year yield show that the central bank is ready to tighten interest rates quickly to check inflation.

Consumer inflation rose 9.06 per cent year-on-year during July-October this year. The full fiscal year target for inflation is five per cent, but it now looks set to touch six per cent in the best case scenario, or even cross it.

The central bank sold Rs26 billion three-month TBs against a total demand of Rs34.9 billion obviously to avoid a sharper increase in their yield. It sold Rs300 million one-year bills against the total demand of Rs1 billion, also for the same reason.

Thus, it sold Rs26.9 billion against the demand of Rs35.9 billion. The central bank had set the TBs sale target of Rs55 billion to match an inflow of Rs56 billion in the banking system due on Thursday through maturity of previously sold bills.

Since the start of the new fiscal year in July, the central bank has so far raised the weighted average yields on three-month and one-year T-bills by 208bps and 224bps, respectively.

It has also raised the average yield on six-month bills by 166bps. These huge increases in T-bill yields particularly that in six-month bills, are aimed at keeping the monetary assets from expanding too fast and thus contain inflation.