KARACHI, Oct 13: The State Bank on Tuesday blocked a sharp increase in the yield on six-month treasury bills and instead allowed a modest raise in it.

The central bank's action reinforces its earlier signals that it would not risk economic growth by raising the interest rates sharply but at the same time keep raising the rates gradually to contain soaring inflation.

The SBP increased the weighted average yield on the six-month government paper by 19 basis points to 3.19 per cent but blocked a potentially higher increase by selling lesser-than-targeted amount of the bills.

Bankers said had the SBP sold Rs5 billion bills as targeted it would have to raise the average yield to 3.4 per cent. The central bank sold Rs1.25 billion bills and kept the yield at 3.19 per cent. Total demand for the bills was Rs8.285 billion.

The central bank blocked a sharper increase in the TBs yield in line with its policy of increasing the interest rates gradually and in a measured way to contain inflation.

Inflation measured by Consumer Price Index or CPI rose by 9.18 per cent in the first quarter of this fiscal year against the full year target of 5 per cent. Government officials and central bankers admit it might end up beyond six per cent at the end of the fiscal year in June.

Since the start of the new fiscal year in July, SBP has made several modest yet consistent increases in treasury bills yields to contain soaring inflation. But it has not allowed the yields to rise too fast threatening the pace of economic growth.

EXPORT REFINANCE: The SBP decision to allow only a modest increase of 19bps in the six-month bills on Tuesday would enable it to keep the export refinance rate unchanged at 3 per cent in November.

This means the exporters would continue to seek concessional export loans from banks at a maximum mark-up of 4.5 per cent. The export refinance rate or the rate at which banks get refinancing from the central bank against their export financing is linked with the yield on six-month TBs.

The central bank normally passes on the increase in TBs yield to its refinance rate in doses of 50bps. So chances are that it would keep the export refinance rate unchanged for November and would raise it by half a percentage point in December i.e. after increasing the six-month TBs rate by up to 30bps next month.

MARKET PRESSURE: But much would depend on whether inflation falls in October and whether the financial market aligns its expectations of interest rates with the projections made by the central bank.

Banks have been demanding much sharper increases in TBs yields than the central bank is prepared to allow. Many of them have taken the view that the central bank would eventually have to accelerate the process of increasing interest rates to keep inflation in check. They say a likely de-freezing of domestic oil prices during this quarter would mount further pressure on inflation.

CPI inflation has moderated from 9.25 per cent in August to 9 per cent in September. It is likely to fall further in October onwards but may remain high enough throughout this fiscal year to fuel the market hopes for a faster interest rate increase.

Since July the central bank has raised the weighted average yield on six-month bills by 112basis points. It has also increased the average yield on three-month and one-year bills by 125bps and 78bps respectively.