KIBOR hits all-time high of 16.81 percent

KARACHI: The Karachi interbank offered rate (KIBOR), a gauge of what banks charge each other to borrow rupee, hits a record high on Monday, as the money market was surprised by the State Bank’s decisions to raise interest rates by 100 basis points.

KIBOR went up by 91 basis points to 16.81 percent, which is an all-time high, data from Arif Habib Limited, a local brokerage house, showed. The three-month KIBOR also increased by 89bps to 17.76 percent. One-year KIBOR rose 90bps to 17.09 percent.

On Friday, the State Bank of Pakistan (SBP) hiked the policy rate to 16 percent, surging to its highest level since 1999. The major rationale for this decision was soaring inflationary pressures. Rising prices are posing a serious challenge to policymakers.

The SBP now expects inflation to average around 21-23 percent this fiscal year. With the consumer price index rising 26.6 percent year-on-year in October, Pakistan has been grappling with escalating inflation. The strong inflation numbers are mostly due to increase in energy tariffs and hike in food prices.

Analysts said the lending rates adjusted accordingly to the increase in the policy rate. “For now only a 100bps increase has been incorporated in the yields but there is uncertainty in the market,” said an analyst.

KIBOR is used as a benchmark rate for lending to consumers and businesses. The changes in KIBOR and thus the borrowing cost for consumers and businesses influence the decisions of the public to consume, save, or invest, according to the information posted on the SBP’s website.

To a query that what impact would the increase in KIBOR have on private sector borrowing, Mustafa Mustansir, head of research at Taurus Securities, responded, “Well it will take a while for the impact to pass on to existing loans due to the re-pricing window, but fresh loans will become expensive right away.”

He also added: “We know already that private sector borrowing has slowed down with decline in working capital loans. Obviously with higher interest rates it will become even more difficult for businesses to borrow to meet working capital needs when these needs have increased by the day due to the ongoing economic condition of the country.”

Secondary market yields also jumped as a result of a surge in KIBOR. The yield on three-month paper increased 97bps to 16.75 percent. The yield on six-month paper rose 104bps to 16.38 percent. Banks are one of the key beneficiaries of a rate hike, with immediate cost increase and a lagged impact of asset re-pricing, resulting in net interest margin expansion in the coming quarters. “All eyes on PIBs and T-bills auctions scheduled for tomorrow (Tuesday) and day after, respectively. Higher re-pricing of banking assets likely,” said an analyst at JS Global.