T-bill auction signals rise in discount rate

The central bank raised its three month treasury bill cut-off yield by 97 basis points to 13.53 per cent on Wednesday, which analysts said was an indication of an interest rate rise in coming days.

The cut-off yield on the 3-month treasury bills was 12.56 per cent in an auction on Oct. 22. The weighted average yield on the 3-month paper came at 12.90 per cent at Wednesday’s auction, up from 12.56 per cent on Oct 22, the State Bank of Pakistan said.

“The rise in the T-bill yield clearly manifests a further tightening of monetary stance. We expect the central bank to increase its policy rate by at least 150 to 200 basis points,” said Asif Qureshi, Head of Research at Invisor Securities Ltd.

Qureshi said monetary tightening may be a prerequisite for securing an International Monetary Fund (IMF) programme. Pakistan is facing a balance-of-payments crisis and has a few weeks to raise billions of dollars in foreign loans to meet debt payments and pay for imports. The IMF and Pakistan are discussing terms and conditions of assistance but the government still hopes friendly governments such as Saudi Arabia will come to its financial rescue.

A government official told Reuters last week the IMF had said Pakistan would need to raise its benchmark discount rate, now at 13 per cent, by 3.5 to 4.0 percentage points. Pakistan had asked the IMF to agree to put off any interest rate increase at least until January, the official said.

“Cash-starved Pakistan is likely to embrace an IMF programme where it would be asked to raise the policy rate,” said Muzzamil Aslam, Economist at KASB Securities Ltd.

“We’re eyeing a 150 basis points one-off rate hike, anytime post today’s auction.” Pakistan’s top economic adviser, Shaukat Tarin said last week interest rates would be raised if it was believed necessary to cut inflation, which is close to 25 per cent.

Tarin also gave the example of Iceland which raised its interest rates by 6 per cent after entering an IMF programme. Foreign exchange reserves fell $400 million to $6.92 billion in the week to Oct 25, out of which the central bank accounted for $3.71 billion.

The rupee ended firmer at 80.90/81.10 to the dollar, compared with Tuesday’s closing of 81.35/45.