SBP inserts over Rs1 trillion into open market

SBP inserts over Rs1 trillion into open market

SBP inserts over Rs1 trillion into open market
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  • The total injections, which included the usual money supply for the seven-day open market operation (injection) on Wednesday, were Rs2.07 trillion.
  • On May 27, Rs1.82 trillion in long-term injections were made. In May 2022, the inflation rate hit a 28-month high of 13.76 percent.
  • Inflation has already spiked 20% this week compared to the same week last year. If the government decides to raise petroleum product prices again in June, the inflation rate would rise above 18%.
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KARACHI: For the second time in a week, the State Bank of Pakistan (SBP) has provided over Rs1 trillion to conventional and Shariah-compliant commercial banks for an unusually long term of 63 days to pressure them to lower interest rates on government loans.

The total injections, which included the usual money supply for the seven-day open market operation (injection) on Wednesday, were Rs2.07 trillion.

After commercial banks boosted the interest rate on new government financing by up to 75 basis points (bps) to 15.25 percent on Wednesday, June 1, the central bank carried back-to-back 63-day OMO (injection).

On Friday, May 27, Rs1.82 trillion in long-term (63-day) injections were made.

“The OMO objective is yet to be achieved,” commented Arif Habib Limited (AHL) economist Sana Tawfik.

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The central bank has continued to provide liquidity for longer periods of time to communicate to the money market that it intends to keep the key policy rate at approximately 13.75 percent, as any strong hike in the rate would have a negative impact on economic activity, she added.

Commercial banks, on the other hand, have continued to raise interest rates for two key reasons.

One, following a major hike in petroleum product prices and energy tariffs to clear the way for the reopening of the IMF loan programme, inflation is expected to hit a multiyear high of roughly 18 percent or more in June, she noted.

The key policy rate of the central bank and the rate of commercial bank lending for the government are both greater than inflation.

In May 2022, the inflation rate hit a 28-month high of 13.76 percent.

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Second, commercial banks are aware that the government has no other alternative for meeting its funding needs because the government has agreed with the IMF not to borrow loans from the central bank for budgetary purposes, she explained.

To borrow from the central bank again, the government must alter the applicable legislation with the central bank’s permission.

Commercial banks fund the government by purchasing government securities such as three- to 12-month Treasury bills and three- to 30-year Pakistan Investment Bonds (PIBs).

In the recent auction held on Monday, the cut-off yields on three and six-month T-bills jumped by 55-75 basis points to 15.25 percent, while the rate on 12-month papers increased to 15.50 percent.

Against a target of Rs750 billion, the government borrowed Rs792 billion.

According to Tawfik, the central bank failed to meet the OMO goal because the government is in desperate need of cash and has no choice but to borrow from commercial banks.

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Read More: SBP increases policy rate by 1.5pc to 13.75pc

“The absence of foreign currency inflows has encouraged commercial banks to demand higher rates,” she said, adding that the foreign inflows would soon bring down the bank rates.

“I don’t think the commercial banks will cut interest rate in the forthcoming T-bills and PIB auctions (planned for mid-June) despite the second 63-day OMO,” Tawfik said.

She predicted that the higher inflation data will keep commercial banks pressed to raise cut-off yields even higher.

If the government decides to raise petroleum product prices again in June, the inflation rate would rise above 18 percent, which is not excluded.

“The weekly inflation reading, measured through the Sensitive Price Indicator, has already spiked 20% this week compared to the same week last year. It rose 2% on a week-on-week basis.”

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She stated that the effects of government actions, such as increases in petroleum products and power costs, are yet to be seen.

“The central bank is expected to increase the key policy rate by another 100-150 basis points in its scheduled meeting for July 7,” she said.

“OMO (injection) is a tool available with the central bank to reduce commercial banks’ interest rate on financing for the government,” she added.

“If the central bank did not conduct OMO, the commercial banks’ interest rate may further shoot up, as they have to supply financing to the government through borrowing from the inter-bank market.”

Borrowing from the interbank market has a higher interest rate than OMO injection.

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