The central bank has provided Rs1.82 trillion to commercial banks for an unusual longer period of 63 days in an apparent bid to rationalise the higher yields on sovereign bonds ahead of the treasury bills auction next week.
Earlier, the government raised less-than-targeted funds because of the higher yields on T-bills and Pakistan Investment Bonds (PIBs) in the auctions held in the past couple of weeks.
The impact of the central bank’s latest action emerged immediately on Friday, as the yields on three-month to 10-year bonds dropped by up to 25 basis points (bps) in the secondary market.
The longer-tenure open market operations (OMOs) are usually conducted to give clear signals to the financial markets that there is no consideration of the hike in the key policy rate, at least until the next monetary policy meeting.
Along with the 63-day OMO (injection), the State Bank of Pakistan (SBP) provided another Rs1.39 trillion through a usual seven-day OMO.
In recent times, the OMO has become a tool with the central bank to indirectly finance the cash-strapped government, as it can no more directly lend funds for budgetary support under the amended laws.
Through the OMO, the SBP provides funds to commercial banks which then invest in T-bills and PIBs to lend money to the government for budgetary expenditure.
On May 23, the central bank jacked up the key policy rate by 150 basis points to an 11-year high at 13.75%. It has cumulatively increased the rate by 675 basis points since September 2021.
The next monetary policy committee’s (MPC) meeting is scheduled for July 7.
Arif Habib Limited (AHL) economist Sana Tawfik said in a commentary that after a gap of almost four and a half months, the SBP injected liquidity into the money market for a period of 63 days. The previous 63-day OMO was conducted on January 7.
Under this and the seven-day OMO, the SBP provided banks with a total liquidity of Rs3.22 trillion.
“The SBP in its latest MPS (monetary policy statement) noticed that since the last MPC meeting held in April 2022, money market yields have risen significantly, which were supposed to be aligned with the policy rate,” she pointed out.
Following the latest hike of 150bps in the policy rate, the SBP expected the rates to normalise in the secondary market.
“It also mentioned in the post-MPS analyst meeting that in case the secondary market yields didn’t normalise, then the SBP could use other monetary policy tools such as OMOs and outright purchases to address any anomaly.”
The yields on longer-tenor bonds declined in the secondary market post-May 23 MPS with three-year, five-year and 10-year yields down 0.31%, 0.22% and 0.20% respectively.
“We expect the yields to come down further in the following week with the recent injection from the SBP,” she said.
“Another reason for the SBP’s injection could be to boost banks’ participation in the upcoming auctions, as the next T-bill auction is due on June 1 while the fixed-rate PIB auction is scheduled for June 22,” she said.
However, Tawfik added, the central bank may further increase the key policy rate in July to counter the expected spike in inflation to 16% following the government increased the petroleum product prices by Rs30 per litre with effect from Friday (May 27).
The inflation reading came in at a two-year high at 13.4% for April and is expected to stand at 14.3% in May.
The inflation may surge to 18% in July if the government continues to increase fuel prices to fully pass the increase in international crude prices on to end-consumers, and collects the petroleum development levy and general sales tax (GST).
The IMF has linked the revival of its $6 billion loan programme to the reversal in energy prices.
The yield on three-month T-bills dropped 20bps on a day-to-day basis to 14.30% in the secondary market on Friday. The yield on six-month T-bill decreased 11bps to 14.50%
Yields on 12-month T-bills and three-year PIBs inched down 5bps and 1bps respectively to 14.60% and 13.50%.
The yield on five-year PIBs dipped 24bps to 12.52% while it dropped 19bps to 12.55% for the 10-year PIBs compared to 12.74% a day ago.
Published in The Express Tribune, May 28th, 2022.
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