Experts attribute the banks’ lack of interest to their understanding that the SBP is likely to increase the discount rate in the monetary policy announcement due on September 13. CREATIVE COMMONS
Banks have given their verdict on the upcoming monetary policy rate by showing their complete lack of interest in the latest auction of market treasury bills (T-bills) of longer tenors.
The Domestic Markets and Monetary Management Department of the State Bank of Pakistan (SBP) did not receive a single bid at the auction of market treasury bills of six- and twelve-month tenors held on September 4. However, the central bank received bids of Rs87.9 billion (realised amount) for the three-month market T-bills.
Experts attribute the banks’ lack of interest to their understanding that the SBP is likely to increase the discount rate – the interest rate at which commercial banks are allowed to borrow from the central bank through the latter’s discount window – in the monetary policy announcement due on September 13.
Auctioned on a fortnightly basis, market treasury bills are always issued at a discount – hence, the difference between their realised and face values. The cut-off yield for the three-month market T-bills at the September 4 auction remained 8.95% with the accepted amount of Rs82.1 billion.
Interestingly, the accepted (realised) amount is only 32.8% of the stated auction target. According to the auction calendar for the first quarter of fiscal year 2013-14, the last auction was supposed to raise Rs250 billion, or 15.6% of the target of Rs1.6 trillion for July-September 2013.
Speaking to The Express Tribune, Emerging Economics Research Managing Director Muzammil Aslam said banks’ participation will resume after the announcement of the new policy rate. “They’ve adopted a wait-and-see approach for now, expecting a hike in the interest rate,” he noted.
The expectation of banks about an increase in the policy rate is not without a basis. The consumer price index (CPI) – a key inflation measure – increased 8.55% in August compared to the same month last year. On a month-on-month basis, the inflation rate increased 1.16%.
Given the small gap of only 45 basis points between the inflation rate and the interest rate in the economy – which is also known as the real interest rate – many experts believe an increase of 50 to 150 basis points in the monetary policy rate is likely.
“With the real interest rate at its lowest level since June 2012, we see a likelihood of an interest rate hike in the upcoming monetary policy,” said a research note by Elixir Securities on September 3.
The declining interest rate has resulted in low yields for the T-bills. For example, the weighted average yield of the three-month treasury bills was 11.77% in an auction held in January 2012 as opposed to 8.95% in the latest auction. It is mainly because of a reduction of 300 basis points in the monetary policy rate since then.
However, analysts are not unanimous in their opinion about the monetary policy rate revision. “Contrary to what many analysts are saying, I believe there isn’t going to be any change in the rate,” said Aslam.
Traditionally, the cut-off yields for market T-bills of longer tenors are higher than that of the three-month market T-bills.
Considering that the latest cut-off yield for the three-month market treasury bills was 8.95%, banks could not price in the anticipated monetary policy rate hike in their bids for six- and twelve-month bills, as the prevailing interest rate is already 9%, Aslam added.
Published in The Express Tribune, September 6th, 2013.
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