Breaking the Bank

SBP signals sharp increase in benchmark policy rate

KARACHI: The State Bank of Pakistan (SBP) has hinted at a sharp increase in the benchmark policy rate after accepting the bids at around 20 per cent in the treasury bills auction. The cutoff yield went to an all-time high in the auction of the Market Treasury Bills (MTBs) held on February 22, 2023.

The acceptance of bids is much higher than the existing benchmark policy rate of 17 per cent. The market is anticipating a massive jump in the key policy rate that can be announced ahead of the scheduled announcement on March 16, 2023.

In the T-bills auction held on February 22, 2023, the cutoff yields of three-, six- and 12-month tenor increased 195 basis points, 206 basis points and 184 basis points, respectively, compared with the previous auction.

The increase in the yields was recorded across all the tenors with major hikes posted at the lower end to mid of the curve.

The market offered Rs347 billion, of which the government accepted Rs258 billion, culminating in a realised value of Rs245 billion. The highest concentration of participation was seen in the three-month tenor with Rs247 billion; followed by the six-month and 12-month with Rs50 billion in each tenor.

Sana Tawfik, a research analyst at Arif Habib Limited, said that with the data available since June 1998, the yields in all the three tenors are at their historic high levels.

“The rise in the treasury yields hint towards the market weighing-in concerns on the economic front with the investors continuing to take note of the rising inflation around the world, as well as in Pakistan,” she added.

The yield curve remains inverted with the yields on the shorter end clocking-in higher than the ones on the other end of the curve. Moreover, the acceptance of the majority funds in the three-month period raises concerns over the profile of the government, which seems to be getting tilted towards the shorter end.

The spread between the policy rate and T-bill rates continues to widen. The investors seeking higher rates can be attributed to the markets’ expectations of interest rate hikes in the light of heightened inflationary pressures, amid a rise in the domestic food prices, additional tax measures, tariff hikes and weaker currency; heavy reliance of the government on domestic financing, particularly from the banking sources due to the lack of financing from non-bank and external sources and increased financing requirements due to the widening of the budget deficit; and heightened policy uncertainty, as the market is anticipating emergency monetary policy meeting before the scheduled one, i.e., due on March 16, 2023.

The last open market operation (OMO) conducted on February 20, 2023 was at 17.08 per cent, around 3 per cent lower than the cutoffs of the latest T-Bills auction.

“This abnormal spread has led to an anticipation of emergent meetings among the financial market stakeholders with the majority now expecting a rate hike of around 2 per cent in the policy rate,” Sana Tawfik added.

According to her, “If we look at the shape of the yield curve to extrapolate markets’ expectations for monetary policy, we see that the secondary market yields since the last monetary policy of January 2023, too have increased up to 200 basis points. This too reflects the market’s expectation of a higher rate hike soon.”

In the last monetary policy meeting on January 23, 2023, the central bank increased the benchmark policy rate by 100 basis points to 17 per cent, highest since October 1997.

Persistently high levels of the Consumer Price Index (CPI) were noted and it is expected to further pick up if remained ‘unchecked’. Hence, the Monetary Policy Committee (MPC) of the SBP felt strongly that inflation must be anchored, as the long-term costs of letting it become entrenched outweighs the immediate costs of bringing it down, so as to embark on a path of price stability and sustainable growth.

Fahad Rauf, the head of research at Ismail Iqbal Securities, said that there are strong rumours in the market that an emergency MPC meeting will be held, where the interest rates will be raised by 200 to 300 basis points to meet the IMF conditions.

“The latest auction result has further increased the probability of a rate hike,” he added.

Mohammad Sohail, CEO of the Topline Securities, said that in the latest treasury bill auction, the government aggressively borrowed Rs258 billion at close to 19.9 per cent, approximately 2 per cent higher than the last auction, which is signalling an increase in the policy rate.

Comments

The rise in the treasury yields hint towards the market weighing-in concerns on the economic front with the investors continuing to take note of the rising inflation around the world, as well as in Pakistan

Sana Tawfik

Research analyst at Arif Habib Limited

There are strong rumours in the market that an emergency MPC meeting will be held, where the interest rates will be raised by 200 to 300 basis points to meet the IMF conditions

Fahad Rauf

Head of research at Ismail Iqbal Securities