The trend in the rates in the T-bills auctions reflects the monetary policy stance of the State Bank of Pakistan. The rates are jacked up when tightening of the monetary policy is desired and vice versa.
Seen from this angle, the T-bills auction conducted on 23rd November is an indicator that the State Bank would be cautious in its approach for the time being and refrain from taking further stringent or aggressive measures unless they become necessary. Some increase in T-bills rates was, however, allowed in view of the prevalent inflation rate which has, practically, refused to budge from its high level despite considerable tightening of the monetary policy during the last one year or so.
The highest amount of Rs 57.7 billion was accepted for 12 months' T-bills and their yield was increased slightly from 8.7784 percent in the last auction to 8.7907 percent. On 6-months' paper, the yield was hiked by 0.1522 basis point from 5.1388 percent to 8.2910 percent but the amount accepted was only Rs 0.8 billion.
However, the cut-off yield for three months' T-bills was kept unchanged at 8.10 percent and the amount accepted was Rs 3.4 billion. The aggregate amount thus accepted was 61.9 billion as against the target of Rs 90 billion and the offers of Rs 78.2 billion.
The hesitation of the State Bank to move one way or the other in an aggressive manner at this point of time is understandable. Before charting future course of action, it wants to see and analyse the full impact of its initiative to tighten the monetary policy in the recent past when the T-bill rates were enhanced from about 2 percent to the present level of over 8 percent.
Some of the effects are already visible. Expansion in private sector credit and money supply has slowed down considerably and price pressures, though still disturbing, have not intensified during the current financial year. A slight increase in the yield on T-bills for 6-months and one year could be regarded as a message that the State Bank envisions no easing of monetary policy for the present and would be prepared to push up the interest rates further if inflationary pressures persist.
This strategy is also in line with the advice of the IMF in its Article IV Consultation Report for 2005. According to the State Bank Governor, the inflation target for 2005-06 is 8 percent, which will be fixed at 6 percent for next year and 5 percent thereafter. We hope that the State Bank would continue to adjust the interest rates accordingly to meet these targets and would not shy away from its responsibility to ensure price stability in the country.
The present price pressures are too severe and obviously the result of delayed action on the part of the State Bank to tighten monetary policy. Hopefully, the mistakes of the past would not be repeated in future.