KARACHI, Feb 2: The State Bank on Wednesday increased weighted average yield on six-month treasury bills to 4.79 per cent from 4.16 per cent on January 5. This reinforces its earlier signals that it would check inflation in the second half of this fiscal year through faster interest rate increases.

The central bank said it had sold Rs1 billion bills at the weighted average yield of 4.79 per cent against the demand of Rs5.35 billion and below the pre-auction sale target of Rs5 billion. The cut-off yield on the bills was 4.86 per cent, up from the January 5 level of 4.32 per cent.

The central bank raised the average yield on six-month bills by 63 basis points, the biggest increase so far during this fiscal year, to keep inflation at seven per cent for the current fiscal year.

On Tuesday, the National Consultative Credit Council (NCCC) headed by State Bank Governor Dr Ishrat Husain revised the annual inflation target to seven per cent from initial five per cent.

It also revised real GDP growth target from 6.6 per cent to seven per cent. The SBP had started tightening interest rates right from the beginning of the fiscal year but the pace of this tightening was measured.

However, as year-on-year inflation shot up to 8.81 per cent during the first half of this fiscal year, necessitating faster increases in interest rates, the SBP indicated in its monetary policy issued on January 19 that it was ready to do this.

The same day, it also increased weighted average yields on three-month and one-year bills aggressively to reinforce its statement. Now by increasing weighted average yield on six-month bills that determines export refinance rate and is also used as a benchmark for corporate lending, the central bank has again signalled that in its fight against inflation it would not mind increasing interest rates faster than in the past.

As the NCCC revised key monetary targets on Tuesday, it also decided to let the government borrow Rs60 billion from banks for budgetary support during this fiscal year, up from the initial estimate of Rs45 billion.

This emboldened banks to demand higher yields on six-month treasury bills than they would have in the absence of such indication, making it difficult for the central bank to increase T-bills yields less aggressively.

But this does not mean the SBP raised the yields on six-month bills by 63bps because of this compulsion. It rather provides a justification for why the central bank did not sell Rs5 billion bills.

In the first half of this fiscal year, the SBP had raised the weighted average yield on six-month bills by 177 basis points to 3.84 per cent. But in just two months of the second half, it has raised the yield on the same bills by 95bps.

This indicates how aggressively the central bank plans to increase interest rates in the remaining four months of the current fiscal year. A faster increase in T-bills yield would make export loans much dearer but at the same time it would pave the way for positive real interest rates.

The export refinance rate went up by two percentage points to 3.5 per cent during the first half of this fiscal year. In January, it remained at that level but during this month, it further increased to 4 per cent.

That in turn, increased the maximum mark-up on export financing from three to five per cent during the first half of the current fiscal year. In January, it remained unchanged as the export refinance rate also remained static, but during this month the maximum mark-up on export finance went up to 5.5 per cent.