Kibor, secondary market yields fall after first rate cut in four years

KARACHI: The six-month Karachi interbank offered rate (Kibor) fell to its lowest level in 15 months on Tuesday following the first interest rate cut by Pakistan’s central bank in four years, prompted by a sharp decline in inflation.

Kibor is the average interest rate at which banks are willing to lend money to other banks. The brokerage house Arif Habib Limited reported that these rates have seen a decline across all tenors, ranging from 36 basis points (bps) to 120 bps.

On a day-on-day basis, the one-week and two-week Kibor decreased by 120 bps and 110 bps respectively to 20.91 per cent each. Similarly, the one-year Kibor dropped by 36 bps to 19.86 per cent, marking the first time it has fallen below the 20 per cent level in 15 months.

The six-month Kibor also saw a reduction of 56 bps, reaching 20.12 per cent, a level not seen since March 2023.

The State Bank of Pakistan reduced its key interest rate by 150 bps to 20.5 per cent on Monday after inflation pressures significantly eased in the country.

Because of a large base effect and a discernible drop in wheat prices, headline inflation has considerably decreased since the start of 2024.

In response to high inflation, the SBP increased the policy rate to 22 per cent in June 2023, and it remained there for nearly a year.

Although the higher policy rate generally hurt the business climate, it also anchored inflation expectations.

The high borrowing costs have made it difficult for businesses to meet their working capital requirements, and the decline in consumer spending has put pressure on the demand for goods and services, said Insight Securities in a note.

The drop in Kibor will stimulate demand for credit to the private sector by encouraging consumers and businesses to apply for new loans. Bank lending to the private sector continued its downward trend for the last fiscal year.

The secondary market yields showed a decline across all tenors. The six-month T-bill yield saw a notable fall of 52 bps on a day-on-day basis, dropping to a level last seen in February 2023.

The SBP in a monetary policy document noted that there are still some upside risks to the near-term inflation forecast, citing the possibility of a sharp increase in inflation in July because of impending budgetary measures and uncertainty around potential future adjustments to energy prices. However, it pointed out that the earlier monetary tightening’s cumulative effect is anticipated to contain inflationary pressures.

Assuming no shocks in food prices and a stable currency, there is ample room for the central bank to further cut rates while keeping real rates positive, said Insight Securities.

“We anticipate that the central bank will further reduce rates by 250-300 bps during the remaining part of 2024,” it said.

“The timing of further rate cuts remains uncertain, as the government is currently in discussions with the IMF.

The outcome of these discussions will play a crucial role in determining the future path of inflation.”

In a post-policy briefing, Governor of the SBP Jameel Ahmad mentioned that “the SBP will evaluate post-budgetary and IMF measures before deciding on any further reduction in interest rates.”