The State Bank of Pakistan (SBP) on Wednesday raised the cut-off yield of three months and 12 months Treasury Bills but left the market with excess liquidity. The SBP held auction for the sale of three months and 12 months T-bills and raised a total Rs 26.261 billion. It had set a target of Rs 55 billion in the wake of scheduled inflows of Rs 54 billion the same day.
The Bank raised Rs 25.974 billion for three months and only Rs 287.31 million for 12 months.
The cut-off yield of both the papers increased. For three months maturity the cut-off yield increased by 52 basis points from 3.33 percent to 3.85 percent.
The cut-off yield on 12 months bills increased by 63 basis points to 4.49 percent.
Money market experts said the huge inflows of Rs 54 billion has created excess liquidity, which pushed down the money market rates. The overnight rate slipped to 1.25 percent from earlier 3.5 percent.
They said the market would face further decline and the overnight rate might touch 0.5 to 0.25 percent.
REUTERS ADDS: Analysts said raise in the cut-off yield was an expected move by the central bank to counter rising inflation.
But some analysts questioned whether the bank was being aggressive enough to control inflation, which is now running at an annual pace of 8.7 percent.
Asif Qureshi, research head at AMS Brokerage, said the auction result showed that the SBP was pursuing a slightly more aggressive tightening stance.
"It is concerned with the rates, and not the amount ... it uses the T-bills as a monetary policy instrument," he said.
Qureshi said the rise in interest rates suggested the central bank's objective was to counter inflationary pressure.
Consumer price index rose 8.70 percent in the year through October, and the SBP said recently it was unlikely that an inflation target of 5.0 percent for the fiscal year to June 30, 2005 would be met.
An analyst at a foreign bank said the rising yield was slow, considering the inflationary pressure.
"This increase in rates would not have an impact on the overall monetary situation," he said. "There is still a lot of catching up to do."
Analysts said the rise in short-term rates would help the government flatten the yield curve.
On Wednesday, the country's benchmark 10-year Pakistan Investment Bond was yielding 7.60/7.65 percent. Until last month, the bond was yielding 8.30/35 percent.
"The central bank seems keen to increase the short-term rates to flatten the yield curve," said Mohammed Sohail research head at brokerage Invest Capital and Securities.
After the auction, the three-month paper traded at 3.60/3.70 percent in the secondary market.
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