KARACHI, April 14: The State Bank on Wednesday raised the cut-off yield on three-month and one-year treasury bills for the third time in two months signalling a slight upward revision in interest rate structure.
The central bank allowed the cut-off yield on three-month and one-year bills to rise modestly as part of its strategy to keep money supply within desirable limits to stem rising inflation.
The three-month and one-year cut-offs moved up to 1.61 and 2.11 per cent from 1.57 and 2.05 per cent respectively as the SBP sold Rs17.15 billion treasury bills of the two tenures at a regular monthly auction. The weighted average yield on three- month and one-year bills also crawled up to 1.61 and 2.07 per cent from 1.52 and 2 per cent respectively.
Since February 19 when the central bank had allowed the cut- offs for the first time after a long interval the weighted average yield on three-month and one-year bills have gone up by 12 basis points and 10 basis points respectively.
The weighted average yield on six-month T-bills that is used as a benchmark for several types of interest rates has also risen by 13bps in three instalments since February 12.
The six-month TBs yield is also used for benchmarking export finance rate. A nominal increase of 13bps or so in six-month TBs yield is not enough to impact immediately on export refinance rate but as the stage seems set for further rises in it the export refinance rate would eventually move up.
Gradual upward revisions in TBs yields were made after the SBP had realized that interest rates had bottomed out and upward adjustment in TBs yield would send this signal to the market. At the end of February 2004 the weighted average lending rate of all the banks combined went up to 5.30 per cent from 5.04 per cent confirming the much popular view-also shared by the SBP- that there was no room for further decline in interest rates.
Though the central bank has started jacking up the yields on treasury bills it still keeps its discount rate unchanged at the November 2002 level of 7.5 per cent. Senior bankers say that the discount rate has long lost its credibility as an anchor of the SBP monetary policy and that they now get wind of the change in the policy through TBs rates.
When the State Bank began allowing a modest rise in treasury bills yield in February this year the process was also aimed at stemming inflation. Consumer inflation or inflation measured by Consumer Price Index had risen 3.38 per cent in seven months to January this year against the full fiscal year target of 3.9 per cent. The latest data indicates that inflation in nine months to March 2004 rose 3.7 per cent.
Senior central bankers say one of the reasons for a gradual increase in treasury bills yield is to keep inflation in check. The central bank forecast says CPI inflation may settle around 3.8-4.2 per cent during this fiscal year but SBP economists say privately it may end up even higher and settle around 4-4.5 per cent.
Senior bankers said that the Wednesday auction of treasury bills had attracted total bids of Rs34.7 billion of which the central bank accepted Rs17.15 billion bids and rejected the rest. Initially the SBP had set a sale target of Rs15 billion but it had to sell a higher amount of TBs to allow a modest rise in treasury bills yields.
They said the central bank sold Rs16.45bn worth of one -year TBs and only Rs700 million three-month TBs against the demand of Rs27.35bn one-year TBs and Rs7.4bn three-month TBs.
The bankers said the SBP sold a nominal amount of three-month TBs to keep the cut-off yield from rising too sharply at a time when it is allowing only a modest rise in treasury bills yields.