KARACHI, Oct 27: The State Bank on Wednesday sent a clear signal to the market that it would not mind increasing interest rates a bit faster to ward off inflationary pressures.

The central bank increased the weighted average yield on one-year treasury bills by 87 basis points to 3.84 per cent but refrained from raising it to the level the market desired i.e. 4.10 per cent.

Senior bankers said the central bank also increased the weighted average yield on three-month bills by 27 basis points to 3.22 per cent but refused to raise it further. The level desired by the market was 4.30 per cent.

The SBP raised the yields on T-bills at a regular auction wherein it sold Rs20.35 billion against the target of Rs50 billion and against the market demand of Rs43.05 billion. The central bank sold Rs20.15 billion three-month bills against the demand of Rs42.15 billion and Rs200 million one-year bills against the total demand of Rs900 million.

The fact that the market interest in one-year bills was very nominal means that banks were not anticipating a sharper rise in the yields on one-year paper in the light of past experiences. Last month, the State Bank had rejected one-year bills to avoid increasing their yield sharply.

The SBP, by allowing a huge 87bps rise in the weighted average yield on one-year bills has tried to signal to the market that it was now ready to make steeper increases in T-bills.

What reinforces this view is that the central bank accepted Rs200 million bids for one-year bills apparently to give the market a direction on interest rate movement rather than for the sake of raising debt. But as it did not allow the yield on one-year bills cross the psychologically important barrier of 4 per cent, it seems the central bank would not allow the market to dictate its term on interest rates adjustments.

The 27bps increase in the weighted average yield on three-month bills show that the SBP view of short term interest rates is that these rates should move up in a measured fashion.