Kibor hits 18-month low on rate cut hopes

KARACHI: The Karachi Interbank Offered Rate (Kibor) reached an 18-month low on Thursday, as a drop in treasury bill yields raised hopes that decreasing inflation would compel the central bank to cut interest rates further in coming months.

In a statement to the National Assembly Standing Committee on Finance, SBP Governor Jameel Ahmad reportedly said that recent budget measures, rising energy and wheat prices, and the deteriorating situation in the Middle East could cause inflation rates to soar in the months ahead. The inflation estimates of 11.5 to 13.5 per cent take these factors into consideration. In addition, he said that the situation in the Middle East would raise the price of crude oil, which would affect reserves and inflation.

Data from the State Bank of Pakistan revealed that Kibor rates for all tenors decreased, with the declines ranging from 2 basis points (bps) to 40 bps on a day-on-day basis.The six-month Kibor, a benchmark rate for lending to consumers and businesses, stood at 18.91 percent, the lowest level since February 2023, down from 19.28 per cent on Wednesday. The three-month Kibor was recorded at 19.16 per cent, compared with 19.49 in the previous session. The nine-month rate dropped to 18.63 percent from 19.03 percent. Both the three-month and nine-month tenor Kibor rates reached their lowest levels in 18 months.

The one-year Kibor also decreased to its 19-month low, settling at 18.08 per cent compared to 18.43 per cent on Wednesday. “The decline in Kibor rates, along with the drop seen in yesterday’s T-bill cut-offs, indicates that the market is anticipating a further reduction in the policy rate in the upcoming monetary policy meeting scheduled for September 2024,” said Arif Habib Limited in a note.

The government successfully raised Rs355 billion through the auction of market treasury bills, surpassing the target of Rs210 billion. Yields decreased across the board. The cut-off yield on three-month T-bills dropped by 52 bps to 18.98 per cent. The yield on six-month papers decreased by 54 bps to 18.75 per cent, while the yield on one-year papers fell by 50 bps to 17.74 per cent. Analysts believe that the recent declinen T-bill yields and Kibor indicates that market participants anticipate further cuts of at least 100-200 basis points in the policy rate in the future.

When the SBP’s Monetary Policy Committee announces its upcoming interest rate decision next month, Pakistan is expected to receive final approval for its new $7 billion loan program with the International Monetary Fund. Pakistan has managed to obtain pledges from China, Saudi Arabia, and the United Arab Emirates to roll over debt for a year.

Last month, the SBP reduced its key interest rate by 100 bps to 19.5 per cent, marking the second consecutive rate cut. As a result of these two cuts, the overall rate has been reduced by 250 bps since the last meeting in June.

The Consumer Price Index (CPI) inflation decreased to a 33-month low, reaching 11.1 per cent in July from 12.6 per cent in the previous month. This figure was notably lower than the current policy rate, leading to a wider real interest rate.

Analysts predict that inflation will soften in the current fiscal year, dropping to 11 per cent. Potential risks include a sudden increase in food prices, particularly wheat, although international prices are currently low. Additionally, the implementation of new tax measures in a mini-budget and escalation of the Middle East conflict could have an impact on the inflation trend.

The SBP anticipates that average inflation will range between 11.5 to 13.5 per cent in FY25, a significant decrease from 23.4 per cent in FY24.The decline in borrowing costs is a positive indication for the growth of private-sector credit. Affordable loans are expected to result in increased demand for bank lending from both large and small businesses as well as consumers.