The Sate Bank of Pakistan on Wednesday hinted that some hike in policy rate is on the cards, as it raised the cut-off yield of three-month treasury bills by 97 basis points to 13.5313 percent, which is above the policy rate, banking sources said. Expected increase in policy rate is a condition of the International Monetary Fund (IMF) for the financial assistance, sources added.
The SBP has conducted auction of 3-, 6- & 12-month Government of Pakistan Market Treasury Bills (MTBs) through primary dealers from November 4-5, 2008. Bids were opened on November 5, 2008, in which the SBP received overall Rs 56,770.9 million worth tender for the sale of 3-, 6- & 12-month MTBs. Bids for 3-month were received worth Rs 53,570.90 million, Rs 1,700 million for 6-month and Rs 1,500 million for the 12-month T-bills.
However the central bank rejected the offers of 6-month & 12-month and accepted all bids worth Rs 53,570.9 million for the sale of 3-month MTB at highest cut-off yield of 13.5313 percent. The cut-off yield of three-month market treasury bills is some 97 bps higher then the last auction held on October 22 when cut-off yield stood at 12.5631 percent and SBP sold some Rs 61,600 million worth 3-month MTBs.
With the current raise, the cut-off yield has reached over the discount rate, which stands at 13 percent and it is not possible for the central bank to acquire loans at 13.5313 percent and provide banks at 13 percent through discount window, banking sources added. They said that SBP already has adopted a tight monetary stance for last two years and continuously increasing the policy rate from 9 percent to 13 percent since then.
"In Wednesday's auction, 3-month T-B yields breached the psychological barrier and policy rate level of 13 percent, indicating a likely policy rate hike on the cards," said Muzamil Aslam, chief economist at KASB.
He said that at present inflows are needed. Pakistan is likely to embrace an IMF programme, where it would be asked to raise the policy rate, adding the same situation was witnessed in recent cases of IMF programme where Iceland and Hungary had to raise policy rates by 600bps and 300bps, respectively. The IMF suggestion is 350bps while market expectation is approximately 150-200bps, he said.
"However, we are eyeing a 150bps one-off rate hike," Muzamil said. He said that inflation has peaked and is likely to slow but demand pressures are still evident which increases balance of payment risk, however full-year inflation forecast stands at 17.5 percent.
"We are expecting inflation to come down to single digit level by May 2009 and if this proves true, the SBP is likely to soften its monetary policy stance from the first quarter of fiscal year 2010," he added. He said that, on the back of Wednesday's MTBs auction, there is no any change expected in Kibor to move sharply upward as this is already on peak.
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