KIBOR hits 10-month low as T-bill yields drop below policy rate

KARACHI: The six-month interbank rate fell to its lowest level in 10 months on Thursday, as treasury bill yields dropped sharply, signalling that the market expects the central bank to start cutting interest rates sooner than previously thought.

The six-month Karachi interbank offered rate (KIBOR), which serves as a benchmark for corporate lending, dropped to 20.98 percent, the lowest since March 2023, according to data from the State Bank of Pakistan (SBP). On Wednesday, it was 21.31 percent.

The decline in the KIBOR followed a sharp fall in the cut-off yields of treasury bills at an auction on Wednesday, where the government raised Rs284 billion, much more than the original target of Rs100 billion.

The yields on all tenors - three, six and 12 months - fell below 21 percent, indicating a significant deviation of over 100 basis points from the SBP’s current policy rate of 22 percent. There was a notable decrease in the cut-off yields, which varied from 44 basis points (bps) to 59 bps.

The majority of the funds were raised in the 12-month tenor, which saw the highest participation and the lowest yield of 20.59 percent, down 59 basis points from the previous auction. Approximately 10 percent of the funds were successfully obtained, out of a total participation of Rs2.75 trillion.

The government also raised Rs161 billion through the auction of Pakistan Investment Bonds with floating rates, focusing on tenors of five and 10 years. “Interest rates in Pakistan are now down 4 percent (400 basis points)," said Mohammed Sohail, CEO of Topline Securities Limited on the social media platform X.

"Benchmark lending rate (6-month KIBOR) down from a peak of near 25 percent in September 2023 to less than 21 percent today, almost at one year low, after T-bill yields fall to near 20.6 percent amid hope of start of rate cut by SBP.”

Brokerage Chase Securities said the secondary markets might witness further declines in T-bill yields as liquidity seeks attractive yields for deployment. “The downward trend in cutoff yields, coupled with robust participation in the one-year tenor, strongly suggests an impending interest rate cut, as per market sentiment.”

Lower lending rates are encouraging for the private sector credit, which has been declining as a result of high borrowing costs and a decrease in overall demand. The reduction in interest rates will assist the government in lowering the high cost of repaying its domestic debt.

The consumer price index (CPI) for December rose 29.7 percent from a year ago. The inflation rate would ease to 20-22 percent in the 2024 fiscal year, according to the SBP, which maintained the policy rate at 22 percent on December 12. Some analysts do not believe that interest rates will drop very soon, despite what the market and investors are betting on.

“We expect SBP to adopt a wait and see approach before starting monetary easing,” said Muhammad Awais Ashraf, director research at Akseer Research. “SBP will wait for the outcome of upcoming elections and the direct impact of further increase in power and gas prices and their second round impacts. Therefore, we do not foresee a rate cut in this fiscal year.”

The latest World Bank report, which anticipates interest rates staying high to combat inflationary pressures, supports Ashraf's prognosis as well. “In Pakistan, the economic outlook for FY24 remains subdued, with growth projected at only 1.7 percent,” said the World Bank in its latest publication Global Economic Prospects — January 2024.

“Monetary policy is expected to remain tight to contain inflation, while fiscal policy is also set to be contractionary, reflecting pressures from high debt-service payments”, it added. The high rate of consumer price inflation in early 2023 was partially caused by currency devaluation. However, a number of factors combined to propel the rupee's stability by late 2023.

These included a reduction in the money supply, a surplus in the balance of payments due to low oil prices and higher remittances, and an agreement with the International Monetary Fund (IMF) on a $3 billion loan program.