The State Bank of Pakistan (SBP) on Wednesday will hold the auction for six - month Treasury Bills. Against zero maturity it has set a target of Rs 5 billion. Market participants are expecting 25 to 35 basis points hike as the last three - month treasury bills auction cut-off yield of 4.3294 percent edged passed January 5, six-month T-bills rate of 4.3228 percent.
Many analysts believe that the recent SBP monetary policy statement also suggests that if required, the central bank would not hesitate to take firmer stance by hiking rates more aggressively to contain threat of inflation.
Though, monetary expansion clearly points towards higher GDP growth. The widening trade gap, excess liquidity in the banking system, unusual rise of property market that has not see a single correction for the last four years, the common sense tells that there may be some nasty shocks ahead. All the indicators are extremely inflationary and, therefore, sharper rate-hike is required, as it is already late.
A treasury head of a foreign bank said: "I do not see big relief in our inflationary number during first quarter of 2005. I see a full percentage point-hike by the end of second quarter as imported inflation and domestic growth would continue to sizzle. The central bank should go for a bigger bit or the pie would get rotten."
Meanwhile, bond market activity has thinned down quite a bit, demand for 10-year Pakistan Investment Bond (PIB's), which is traded actively in the secondary market has lost its gloss.
There are reports that there have been a number of inquiries from the corporate sector and holder are exploring for a possibility to offload their instruments around a yield of 7.50 percent. The yield bounced back from last months high of 7.62 percent to 7.90 percent.
The last PIB auction which was held on November 11, 2004 failed to attract buyers, as sentiments of bond traders on interest rates is bullish. The next PIB auction is due in March, and the market is likely to demand higher yield.
At present, liquidity in the market is estimated to be between Rs 8 billion to Rs 10 billion with (OMO) maturity of Rs 11 billion on Thursday.
Market estimates that security held by banks and financial institution is between 20 percent to 25 percent above the Statuary Liquidity Requirement (SLR), which also suggests that few of the banks may be short of required securities.
Money market dealers are of views that if the SBP is offered an amount of Rs 10 billion to Rs 20 billion at a yield between 4.6 percent and 4.7 percent, the SBP may not disappoint the market, but may not jack up the rates for a tiny amount. They say that suppose if the SBP accepts T-bills worth Rs 1 billion by hiking 25 basis points or more than bigger move could surely be in the pipeline.