KARACHI: Returns on treasury bills again reduced on Wednesday.

The auctions of t-bills held by the State Bank showed that the cut-off yield on papers of all three maturities was reduced and the major cut was for three-month papers.

Since cut in the policy interest rate by the State Bank witnessed a 4.5 per cent fall since July 2011, the cut-off yield on these papers is declining, reducing investors profits while benefiting the government.

In the last auction held on Jan 10, t-bills rates were slashed by 9 basis points on all categories of papers.

The latest reduction was introduced for three-month t-bills by 9 basis points, 6-month by 4 basis points and 12-month for 2 basis points.

Now the cut-off yields for 3, 6 and 12 months are 9.09 per cent, 9.16 per cent and 9.25 per cent respectively.

The policy interest rate is currently 9.5 per cent per annum which is attractive for private sector borrowers but discouraging for banks as they largely depend on investment in government papers for their earnings.

Despite low interest rates, the private sector has not yet shown willingness to use banks money, and the government is making record borrowing from scheduled banks.

Economists and analysts observe that banks have lost their relation with economy as most of their money is used for unproductive investment in government papers.

Shrinking profits of banks would ultimately reduce returns on deposit.

The depositors have been getting negative returns for years but for the first time, inflation dipped to as low as about 8 per cent giving hope to depositors to get positive returns.

The July-December, average Consumer Price Index (CPI) showed 8.3 per cent inflation.

However, chance for sustainability of low inflation for any longer period is doubtful since it has already started increasing.

The CPI in November was 6.9 per cent which rose to 7.9 per cent in December making the six months average 8.3 per cent.

Banking experts and analysts believe the Central Bank took risk by slashing the policy interest rate to as low as 9.5 per cent hoping to boost the economy with greater supply of liquidity.

However, the private sector remained unmoved with these steps and main inflation started getting strength.

The recent hike in the consumer goods prices would certainly hit inflation in coming days and weeks, particularly after the sudden rise of wheat and flour prices despite bumper wheat production in the country.

Many analysts commented in their reports that the Central Bank’s decision to bring down discount rate to single digit was a political one since elections are scheduled in the second half of the current fiscal year.

A senior banker said the next monetary policy would be crucial that would reflect the policy direction.

If interest rates are further reduced, inflation would get the field, and if interest rate increases, elections would get negative response, he said.