T-bill yields jump to 22 percent on rate hike bets

KARACHI: The cut-off yields on treasury bills rose on Wednesday as investors expect another big interest rate hike in next monetary policy meeting due in April.

Besides controlling inflationary pressure, the market participants believe interest rate to remain a function of Pakistan’s ongoing negotiation with the International Monetary Fund (IMF).

The decision to raise the policy rate will help unlock the stalled IMF programme. The yield on the three-month T-bill rose 100 basis points (bps) to 22 percent, with the yield on the six-month paper up 114bps at 21.99 percent. The yield on the 12-month T-bill increased 50bps to 21.49 percent.

The government managed to raise Rs1.14 trillion against a target of Rs900 billion. It was the auction before the monetary policy announcement due on April 4, 2023. The participation was mostly seen in the three-month papers, at above the previous cutoff levels of 20.99 percent.

According to analysts, the market expects a 100-200bps increase in the policy rate at the upcoming review. “The fear of a further rise in interest rates is still there however, with the decline in oil prices and other commodities, the concern should ease. IMF programme is still not in place and the outlook on currency is unclear,” said Chase Securities in a note.

“In case of further delay in IMF and currency devaluation, the inflation numbers can continue to surprise,” it added. The central bank recently increased the policy rate by a whopping 300bps to 20 percent. As per the Monetary Policy Committee, the decision was taken as risks to inflation, due to external and fiscal adjustments which were identified in the previous policy meetings, had materialized and become partially visible in the consumer price index (CPI) numbers. Moreover, the MPC also revised its CPI forecast for the year to 27-29 percent against an earlier forecast of 21-23 percent.

“Inflation in the upcoming months is likely to remain elevated as the impact of external and fiscal adjustments (including additional taxation, tariff hikes, weakening of the currency and ‘Ramadan factor’) unfolds,” Arif Habib Limited said in a note last week.

The average inflation for 8MFY23 clocked-in at 26.2 percent compared to 10.5 percent in same period last year. Core inflation continues to creep higher each month as inflationary pressures rise and broaden, reflecting the spillover effects of the rupee weakening amid ongoing debt repayments and lower financial inflows, according to the note.