T-bill yields rise on SBP easing doubts

KARACHI: The yields on treasury bills increased on Wednesday as traders were sceptical that the central bank might still have room to cut interest rates at its upcoming policy meetings despite persistently high core inflation and ongoing external account pressures.

The yield on one-month T-bills rose by 34 basis points (bps) to 12.3898 per cent, according to the auction results issued by the State Bank of Pakistan.

The yields on three-month T-bills increased by 19bps to 12.01 per cent, six-month T-bills rose by 33bps to 11.9999 per cent, and the yields on 12-month T-bills also increased by 11bps to 12.01 per cent.

In the latest T-bill auction, the government raised a total of Rs640 billion, which was slightly below the target of Rs650 billion. The total bids received amounted to Rs1.085 trillion.

The auction result was announced following a staff-level agreement (SLA) between the International Monetary Fund (IMF) and Pakistan for the first review of the ongoing 37-month Extended Fund Facility, which could release a $1 billion tranche, and a 28-month $1.3 billion Resilience and Sustainability Facility.

The IMF stated that to maintain inflation within its medium-term target range of 5-7 per cent, Pakistan will continue to implement a data-dependent and tight monetary policy stance.

The March inflation reading, which will be released in early April, along with the finalisation of the IMF’s review and improvements in the country’s economy, will draw attention to the SBP’s policy meeting on May 5. Observers will be looking for indications on whether the central bank will continue its easing cycle or adopt a more cautious approach.

“Bid pattern shows market participants are not optimistic about rate cuts, however the acceptance pattern is showing indications from the government for further monetary easing,” said Awais Ashraf, director of research at AKD Securities Limited.

“Substantially high real interest rates and improvement in foreign inflows along with release of tranche from the IMF would create room for interest rates to fall into single digits,” Ashraf added.

According to the finance ministry’s monthly economic outlook, the country’s inflation is likely to remain steady in March, estimated within the range of 1-1.5 per cent. However, inflation could slightly increase in April, reaching the 2-3 per cent range.

Pakistan’s gross domestic product (GDP) grew by 1.73 per cent in the three months ending in December compared to the same period last year. Growth was revised to 1.34 per cent for the July-September period, as shown by official data.

Sana Tawfiq, head of research at the Karachi-based brokerage firm Arif Habib Limited, noted that T-bill yields have been rising since the last monetary policy meeting on March 10, when the SBP decided to keep its benchmark interest rate unchanged at 12 per cent, contrary to market expectations of a rate cut.

Although headline inflation is significantly low, with forecasts for March inflation expected to be less than 1.0 per cent, it has become less relevant, Tawfiq said.

“Core inflation remains sticky, hovering between 8-9 per cent, as highlighted by the SBP in its recent monetary policy statement. Additionally, pressures on the external account continue, with the import bill exceeding $5 billion for the last two months, and the rupee has been depreciating slightly since January,” she said.

“These factors are creating uncertainty among traders regarding the SBP’s stance at upcoming policy meetings. The current market expectation is for a continuation of the pause in the easing cycle, with any rate cuts likely to occur in the latter half of the calendar year. For now, rates are expected to remain stable at 12 per cent,” she added.