Pakistan’s central bank provided Rs491.70 billion to the conventional and Shariah-compliant banks for a longer period of two and a half month for the first time apparently to bring down the interest rate on financing to the government.
“In an immediate reaction to the injection for the longer period, the yield on three-month T-bills fell by 65 basis points to 14.60% in the secondary market on Friday … from (around 11-year high of) 15.25%,” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune. Commercial banks lend to the government through investing in three to 12-month T-bills and three to 30-year Pakistan Investment
Bonds (PIBs).
The expert said the primary objective of the central bank injections seemed to be that it wanted to narrow down the gap between its key policy rate of 13.75% and the rate of commercial banks’ financing to the government that had remained unchanged at an 11-year high at 15.25% in the past two auctions of T-bills conducted in the last
two months.
“The State Bank of Pakistan (SBP) wants to give a signal to the market that its existing key policy rate of 13.75% is appropriate for the time being … and a further hike in the rate may be damaging for the economy,” he said.
Earlier, the central bank increased its policy rate by 675 basis points since September 2021. Sometimes it has to increase its rate to narrow down the gap between the policy rate and commercial banks’ lending rate for
the government.
Earlier, the banks used to adjust their interest rate in accordance with the central bank’s rate.
The key policy rate remained a tool available with the central bank to create a balance between inflation reading and economic growth.
The central bank has injected the amount ahead its next scheduled meeting to review monetary policy statement (MPS) on July 7. “I think the State Bank’s monetary policy committee would maintain status quo in the key policy rate on July 7,”
he said. If the bank increases the rate, it would be nominal in range of 25-50 basis
points, he said.
SBP injected Rs491.70 billion at an interest rate of 13.85% through a 77-day long open market operation (OMO). The central bank record available since May 2008 showed no OMO of 77-day in the past.
Recently, it had conducted a number of 63-day OMOs to cool down banks’ lending rate. However, recent 63-day OMO, which also stood rare in the history, had failed to bring down commercial banks’ interest rate.
The central bank also conducted funds injection operations ahead the auction of T-bills and PIBs, as State Bank of Pakistan (SBP) cannot directly finance the government for its annual budgetary expenditure under the new legislation done to win IMF loan programme in the recent past.
Ismail Iqbal Securities Head of Research Fahad Rauf said in a commentary “SBP has yet again invited bids for longer tenor OMO, signaling that interest rates would stay at current level.”
To note, SBP has already locked-in 94% of the outstanding OMO (Rs4.1 trillion) in 63-day OMOs. Thus, the size of Friday’s OMO is not like to be a big one. However, it sends a strong signal to the market.
“This combined with developments on IMF can bring yields down to some extent as market had incorporated 100 basis points increase…secondary market yields are down by 15-20 basis points (on day-to-day basis).”
OMO breakdown
SBP supplied Rs402.02 billion at an interest rate of 13.84% to conventional commercial banks through 77-day OMO.
It injected another Rs89.50 billion at an expected interest rate of 13.85% to Shariah-compliant bank through the 77-day OMO.
In addition to the 77-day OMO, the central bank supplied another Rs100 billion to Shariah-compliant banks for 6–day period through
6-day OMO. Commercial banks showed no interest on the central bank offer of loan for six-day period, according to the central bank.
Published in The Express Tribune, June 25th, 2022.
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