SBP may raise policy rate as yields stay high

Rupee hits new all-time low at Rs206.46 against US dollar

KARACHI:

Commercial banks have maintained interest rates at a recent 11-year high at 15.25% on financing to the government for a period of three-month, signaling that the central bank may increase its key policy rate in the range of 50-100 basis points early next month.

The interest rate on financing for six and 12-month tenure, however, dropped 30 basis points and 55 basis points, respectively, after the government raised small financing under the tenures against notable high targets.

On the other hand, the rupee crossed the threshold of Rs206 against the US dollar for the first time in the inter-bank market on Thursday, as the domestic currency freshly fell 0.63% to a new all-time low of Rs206.46. It had briefly surpassed the Rs207 level during the day as well.

The government has raised a total of Rs834 billion against the set target of Rs750 billion through auctioning three to 12-month T-bills to commercial banks.

Out of the raised funds, the government would repay Rs725 billion to the commercial banks against their maturity debt instruments on Thursday, according to the State Bank of Pakistan (SBP) on Wednesday.

Commercial banks had offered Rs1,098 billion to lend to the government against the government target of Rs750 billion in the auction.

The cut-off yield (commercial banks’ interest rate to the government) on 3-month T-bills remained unchanged at 15.25% in the latest auction compared to the previous one. “This suggests the central bank would increase its key policy rate in the range of 50-100 basis points on July 7 against previous expectation for 100-150 basis points hike,” Arif Habib Limited Head of Research Tahir Abbas said while talking to The Express Tribune.

The key policy rate stands at 13.75% at present.

A 50-100 basis points hike in the key policy rate would narrow down the gap between the commercial banks’ three-month cut-off yields and the central bank’s policy rate to near and around traditional levels.

Traditionally, the cut-off yields used to be higher by less than 100 basis points compared to the policy rate.

“The expected hike in the key policy rate by the central bank may be the last surge in the rate under the current cycle of rising key policy rate,” Abbas said.

The central bank had cumulatively hiked the rate by 675 basis points since September 2021 to 13.75% at present.

He argued the inflation reading may spike over 20% in the months to come after an increase in the prices of energy products in the country, but it does not mean the key policy rate would also rise close to the expected future inflation reading.

“Key policy rate is increased to a level,” he said. “A further hike may hurt economic activities in the country.”

He said inflation readings in Turkey are hovering around 90%, but it has maintained its key policy rate around 15%.

T-bills auction results

The government raised Rs756.97 billion through auctioning three-month T-bills (competitive bills and non-competitive bidding) against the set target of Rs250. The 3-month cut-off yield remained unchanged at 15.25% compared to the previous auction held on June 1.

It raised Rs24.03 billion against the target of Rs250 billion through selling a 6-month T-bill. Accordingly, the cut-off yield dropped 30 basis points to 14.95% compared to 15.25% on June 1.

It borrowed another Rs53.08 billion against the target of Rs250 billion through auctioning a 12-month T-bill. Therefore, the cut-off yield was reduced 55 basis points to 14.94% in the auction compared to 15.50% in the previous auction. 

Rupee down

The rupee has maintained a downward trend for the fourth consecutive working day on Wednesday. Cumulatively, the domestic currency has lost 2.83% (or Rs5.69) in the four days to Rs206.46 against the greenback to date.

Tahir said “the due high payments against oil imports and reports about cancellation of export orders caused panic in the currency market.”

Besides, uncertainties on the resumption of the IMF loan programme have continued to play on the minds of currency traders, as demand for foreign currency remained significantly high against lesser supplies in the inter-bank market.

Sukuk assets

The government has added Islamabad International Airport (IIA) to the list of assets to raise new financing against it from domestic Shariah-compliant banks ahead of the issuance of the next Sukuk scheduled for June 20, 2022.

 

Published in The Express Tribune, June 16^th, 2022.

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