Yield on three-month bills also increased to 12.6 per cent from 12.51 per cent in the previous auction, showed the results of the auction announced by the State Bank.
“The rise in the yield of six-month bills suggests that the State Bank may increase its benchmark policy rate by 50 basis points in the upcoming monetary policy, which is expected to be announced at the end of current month,” a research house analyst said. Even if the rate is left unchanged this time, it may be increased during the next review scheduled for November, he added.
Contrary to expectations, in the previous monetary policy announced on July 30, the State Bank enhanced the policy rate by 50 basis points to 13 per cent.
The analyst said conditions are not favourable for a low interest rate as high fiscal deficit and heavy government borrowing from the State Bank are putting pressure on the exchange rate as well as the economy. Besides, inflation is feared to rise by 15 per cent in the wake of damaged caused to crops by flash floods.
Meanwhile, Sayem Ali, an economist at Standard Chartered Bank (Pakistan) Limited, in a research report saw a further 100-basis-point increase in the policy rate in the current fiscal year. However, he said the central bank may wait for clarity on the extent of flood damage to the economy before a further hike.
In the last financial year ended on June 30, the fiscal deficit surged to 6.2 per cent of gross domestic product compared with the target of 5.1 per cent. In the current year, the deficit may rise up to seven per cent against a target of four per cent.
According to a report, government borrowing from the central bank soared to Rs155 billion in the first seven weeks of the current fiscal year. In the same period a year ago, it had borrowed Rs21 billion from the State Bank.
During the auction, the State Bank said that it accepted offers worth Rs75.09 billion against bids of Rs96.61 billion for three, six and 12-month market treasury bills. The target set for the auction was Rs75 billion.
For three-month treasury bills, the State Bank accepted the highest amount of Rs53.16 billion, which showed that banks and development finance institutions wanted to keep their money blocked for a shorter period in anticipation of a rise in interest rate.
For six-month bills, offers worth Rs19.7 billion were accepted while for 12-month paper Rs2.22 billion were realised. Yield on the 12-month paper remained unchanged at 12.78 per cent.
Published in The Express Tribune, September 9th, 2010.
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