The Monetary Policy Committee of the State Bank of Pakistan (SBP) is strongly expected to raise the policy rate by at least 200 basis points to 24 percent after the regulator’s latest auction of Treasury Bills (T-Bills) which saw the government raise Rs. 1.3 trillion domestic debt at extortionate rates of up to 25.06 percent.
Official data indicates that the cut-off yields for the three-month T-Bills jumped by 162 basis points to 24.49 percent from 22.88 percent observed on 23 August. Similarly, proceeds for the six-month paper were raised at a rate of 24.78 percent, while yields on the 12-month paper spiked by 213 bps to 25.06 percent from 22.94 percent recorded in the previous auction.
Compared to 24.49 percent this week, the commercial banks’ financing rate had been around 15.7 percent for the sought-after three-month bill back in October 2022.
Data indicates that financial institutions (commercial banks) have increased the cost of lending (cut-off yield) to pro-inflationary levels, fueling expectations that the central bank would further hike its benchmark policy rate by at least 200 bps to an all-time high of 24 percent in the upcoming monetary policy meeting on September 14, 2023.
Economic Analyst A H H Soomro told ProPakistani,
I don’t think the government can afford to increase the monetary policy rate. Fiscal implications are plenty. However, the government is extremely compressed now with limited borrowing options. Further hikes may not solve the problem if PKR can be controlled without such tightening measures.
On Wednesday, the government planned to borrow Rs. 1,950 billion through the auction of sovereign debt securities to commercial banks to meet growing expenditures including interest payment on the outstanding debt. Results of both competitive and non-competitive bids showed that the government raised Rs. 1,292 billion from the competitive auction and Rs. 40 billion through non-competitive bids, accumulating total proceeds of Rs. 1,332 billion at costly lending rates as high as 25.06 percent.
According to sources well-informed on the matter, the central bank is already planning to raise the benchmark lending rate by 2 percent in response to yesterday’s T-Bill auction. They said given the circumstances, the new rate is already being priced in. “Concerns are mounting within domestic financial markets about rising borrowing costs, with fresh debt auctions on Wednesday joining other indicators in sounding the alarm. The reaction to upcoming MPC is clear as day,” one of them added.
Scores of analysts have also opined that a 2 percent interest rate hike is imminent and that it would further widen interest payments by Rs. 200-450 billion each year.
Treasury Bill financing rates have been rising since 2022 and have stayed above 20 percent for the greater part of 2023, despite banks often finding solid profits on government securities.
In this writer’s view, further policy rate hikes could prove fruitless. Yesterday’s T-Bill auction hints at the government’s move to pick up its desired expenditure targets despite the signaling effect it would send to the markets. Despite the high cut-off rates, the government went ahead and raised the costly debt, effectively bypassing SBP to fulfill yet another condition of the International Monetary Fund.
Follow ProPakistani on Google News & scroll through your favourite content faster!
Support independent journalism
If you want to join us in our mission to share independent, global journalism to the world, we’d love to have you on our side. If you can, please support us on a monthly basis. It takes less than a minute to set up, and you can rest assured that you’re making a big impact every single month in support of open, independent journalism. Thank you.
The increase in policy rate is of course not the complete solution of the prevailing inflation, however, it works to a great extent in the documented economies. Unfortunately Pakistan economy is more than fifty percent is un-documented as such other measures suggested in the editorial and the government expectations ( rather concerns) are equally important to be implemented simultaneously.