The way the money market behaved yesterday in the T-Bill auction, there is an expectation of an increase in the interest rates. The fact of the matter is that the market is still confused. SBP and MoF are giving divergent signals. One is saying that there is no need for a further increase in discount rates, while the other is implying that the IMF is pushing for a significant increase. Clarity and coherence in communication is missing. And the problem is in such turbulent times, no communication would be enough. The market can only be calmed by actions. Reach the SLA on an emergency basis, by bringing financial assurances on gross financing. Nothing else matters.

In the T-Bill auction, the cut-off yields increased from 95-120 bps to around 21 percent. With a policy rate of 20 percent, this implies that the market has accepted the rates. However, the fact that most participation below 21 percent is primarily in 3M paper with nothing in 6M and 12M, while the auction size was substantially large, at Rs1.8 trillion.

The question is if the next monetary policy is due on 4th April 2023 – with a little more than three weeks to go - why have the banks taken the risk of parking big chunks for 3 months, especially if they expect rates to increase further. For this to happen, SBP behavior in OMOs must be taken into consideration. SBP did an OMO of Rs1.7 trillion at 20.09 percent for 77 days. That has given cushion for banks to park similar amount at 21 percent. Thus, perhaps SBP guided (or wanted) banks to do so. And the treasurers complied like good boys.

That is the story of the auction. The question is why the market is still confused. On one hand, SBP gave forward guidance in its latest monetary policy that barring another external shock, real interest rates are in positive territory on a forward-looking basis – implying no need for further increase in the immediate term. Then the FM told the business community that the IMF wanted another 3 percent interest rate increase. The next day SBP governor clarifies that the 300bps increase was a result of SBP’s independent decision making and not a result of any demand by the IMF.

These mixed responses just add to the confusion. The market is fragile. Slippages in the money and currency markets have to do with uncertainty and lack of a clear path from the finance ministry and the central bank. Give stability to the market and it will adjust accordingly. And because of uncertainty and poor communication, the exchange rate has continued to slip, and no one is ready to invest beyond 3 months. It is high time that SBP demonstrates its independence and comes out of the shadow of the Q-Block.