KARACHI, May 26: The State Bank on Wednesday increased the cut-off yield on six-month treasury bills by 39 basis points to 2.23 per cent. This clearly indicates that the central bank is now left with no better choice than to push up interest rates to contain rising inflation.
Inflation indicated by consumer price index skyrocketed to six per cent year-on-year in April primarily on higher food and fuel prices and seems set to touch seven per cent by end of next month.
In 10 months to April 2004 inflation moved up by 3.93 per cent and may reach 4.5 per cent in full fiscal year July/June 2003/04 against the initial target of 3.9 per cent.
Economic managers have been defending a higher than targeted inflation saying it is a by-product of higher than estimated GDP growth. They say that GDP may grow by six per cent or even higher during this fiscal year against an initial target of 5.3 per cent.
But it is becoming difficult for them to sell this theory because in a country where one out of three persons is living below poverty line. Even economists seem unwilling to buy this theory primarily because the poor people are benefiting less from the gains of higher growth a key reason for which is distorted distribution of national wealth.
That is where the monetary policy comes into picture and monetary officials can alter it suitably to keep inflation in check and also ensure that poorer people get increased share in aggregate national wealth.
It is against this backdrop that the central bank has started - though belatedly - sending signals to the market that after hitting historic lows the interest rates have bottomed out and may now move upwards. The 39bps increase in the cut-off yield on six-month treasury bills has come to the strongest signal to this effect.
What lends this theory extra credence is the fact that the SBP raised the yield at a small auction wherein it sold only Rs1.6 billion T-bills against the target of Rs2 billion and against the total demand of Rs3.8 billion.
Had the cut-off yield been increased at a larger auction of the bills this could have been attributed to the pressing need of the SBP to mop up maximum liquidity.
EXPORT FINANCE RATE: With the increase in the yields on six- month treasury bills export financing also looks set to become dearer in June. The export refinance rate or the rate at which the central bank makes reimbursement to the banks against their export financing is linked with weighted average yield on six- month treasury bills.
Since August 2003 export refinance rate has remained pegged at 1.5 per cent with the result that eligible exporters have been receiving export loans at a maximum of 3 per cent markup. (The banks are allowed to charge a maximum spread of 1.5 per cent over the export refinance rate).
Senior bankers say with the increase in the weighted average yield on six-month treasury bills the export refinance rate may rise by at least a quarter percentage point in June 2004.
Whereas the cut-off yield on six-month bills increased by 39 basis points on Wednesday its weighted average yield moved up by only 23bps from 1.84 per cent to 2.07 per cent.
That is why many bankers believe that export refinance rate in June may rise by a quarter percentage point or so. But others say the rate of export refinance may rise by half a percentage point from 1.5pc to 2pc - the level where the weighted average yield on six-month bills now stand.