KARACHI: The six-month Karachi interbank offered rate (KIBOR) on Monday increased by 87 basis points to 10.03 percent following last week’s sharper-than-expected hike in interest rates by the State Bank of Pakistan (SBP), central bank data showed.
The double digit six-month KIBOR, the benchmark for short-term lending, shows private businesses would see a big increase in the financial cost in days ahead as a major portion of borrowing for these firms comes from KIBOR led lending.
The SBP raised its key policy rate by 1.5 percentage points to 8.75 percent on Friday. It lifted the policy rate by 175 bps over the last two months. A sharp increase in interest rates sooner than previously expected reflects a shift in the central bank’s earlier gradual and measured policy stance.
Analysts said the change depicts an abrupt increase in inflation and the balance of payments expectations as the balance of risks shifted away from growth to inflation and the current account.
Besides interest rates, the KIBOR also surged on the back of a rise in treasury bills yields. “The secondary market yields have increased by around 100-120 bps versus Friday,” said an analyst at Ismail Iqbal Securities.
“The three-month T-bill is trading at 9.8 percent, compared with Friday's secondary market treasury bond rates (PKRV) of 8.6 percent.” The three-year bond is trading at 11.4 percent versus Friday's rate of 10.5 percent.
“This implies that market is expecting at least another 100bps increase in near term,” the analyst said. Analysts said the KIBOR would maintain its upward trend as the SBP is likely to continue monetary tightening aggressively during the current fiscal year to tame surging inflation.
“Moreover, the SBP is worried about the balance of payments risk,” another analyst said. The current account deficit stood at $1.7 billion October, the biggest monthly deficit since 2018. The rupee depreciation and further adjustment in fuel prices and local power and gas tariffs could force the inflation move into double digits soon.
The interest rate hike came after the SBP increased cash reserve requirements (CRR) for banks from 5 percent to 6 percent to lower aggregate demand and tighten money supply that could help curbing inflation. Money supply grew by 16 percent on average in 2021 to date.
It is higher than the last eight-year average M2 growth of 13-14 percent. Above average M2 growth is driven by high government borrowing from banks, increasing private sector credit and remittances.
Analysts said upsurge in the KIBOR and the CRR may squeeze growth in the private sector credit off-take as industries and companies could be reluctant to take loans at higher rates. However, the concessionary lending schemes like TERF [Temporary Economic Refinance Facility] and LTFF [Long-term Financing Facility] could continue to support the investment activities in the country.
The SBP, however, expects to see higher returns for savers following increase in policy interest rates. Customers can now lodge complaints at the SBP against those banks who would not pass on the benefits of the rate rise to the depositors.
“As a result of the SBP policy rate increase announced on Friday and as per SBP regulations for bank customers, the profit rate on your saving account should rise by 1.5 percent to a minimum profit rate of 7.25 percent by December 1, 2021 at the latest,” central bank said in a tweet. “If your bank gives you less profit on your savings account, please file a complaint with your bank. And if not resolved please contact SBP customer complaints.”