• Jump in benchmark tenor against expectations of some market dealers
• Others say rise in the treasury bill cut-off yield ‘has no connection’ with broader interest rate trends

KARACHI: The State Bank of Pakistan (SBP) increased the cut-off yields for the benchmark six-month treasury bills by 100 basis points on Wednesday but kept the rates unchanged for other maturities, indicating the future interest rate trend.

The sudden jump in the six-month papers rate was surprising for some market dealers because inflation fell significantly in March, opening the door for an interest rate cut.

The increase in six-month yields has helped almost equalise rates across all tenors.

March inflation reached its lowest point in nearly two years, falling to 20.7 per cent year-on-year. This was the third consecutive monthly decline, bringing the July-March average inflation to 27.22 per cent compared to 27.19 per cent a year ago.

The market expected a decline in the policy rate in March, but over 23pc inflation did not allow the policymakers to bring down the interest rate.

According to the State Bank, the return on six-month Treasury bills increased by 100 bps to 21.39pc from 20.39pc in the previous auction.

The government raised Rs160 billion for the three-month tenor, Rs143bn for six months, and Rs210.6bn for 12 months.

The government raised Rs557.6bn against the target of Rs525bn, while the total bids were Rs994bn.

Market experts said the cut-off yields on treasury bills are higher than the inflation, which does not reflect the actual situation regarding the future interest rate trend.

The rates for three- and 12-month bills were kept unchanged at 21.66pc and 20.89pc, respectively, while the yield for six-month papers increased to 21.39pc.

Experts point to the challenging economic landscape marked by a steadfast 22pc interest rate since June last year, which has significantly stifled economic growth. The State Bank has been anticipating low inflation in the second half of the current fiscal year. Inflation has started falling, but not up to the expectations of the monetary policy architect.

The high borrowing costs have deterred private sector investments, leading to a sharp contraction in GDP growth and a modest economic growth rate of just 1pc in the second quarter, well below the government’s 3pc target.

Faisal Mamsa, CEO of Tresmark, however, remains optimistic about the near future, predicting a reduction in the interest rate in the upcoming monetary policy statement. “I believe the interest rate will be reduced in the next monetary policy on April 29,” he said.

Mr Mamsa said the rise in the six-month Treasury bill rate “has no connection” with broader interest rate trends.

“The stars are aligned for aggressive rate cuts. We forecast a 200 bps rate cut in April MPS (monetary policy statement) and another 200 bps rate cut in the June MPS, based on our inflation expectation of 18pc and 17.5pc in April and May and a stable currency position,” he said.

Published in Dawn, April 4th, 2024