T-bill yields drop by 30-56bps amid hopes for another rate cut

KARACHI: Yields on market Treasury Bills fell on Wednesday due to increased expectations of another interest rate cut by the central bank next week in response to easing inflation pressures.

The cut-off yield on the three-month T-bill dropped by 56 basis points (bps) to 19.49 per cent. The yield on a six-month paper decreased by 50 bps to 10.29 per cent, while the yield on a 12-month paper fell by 30 bps to 18.24 per cent.During the latest T-bill auction, there was a participation of Rs1.793 trillion, and the government raised Rs481 billion compared to the target of Rs150 billion and maturity of Rs123 billion.

The upcoming monetary policy will be announced on Monday two days before the release of the inflation reading for July. Market participants anticipate a low consumer price index inflation of 11-12.6 per cent in July, building expectations of a rate cut by the State Bank of Pakistan for a second straight time.

Most analysts expect a 100 bps cut in the policy rate at its upcoming meeting, while some expect a 150 bps rate cut.The upcoming monetary policy meeting is drawing attention as the markets will be watching to see if the SBP continues its recent trend of (monetary) easing or if it maintains the current rate, especially considering the government’s announcement of the budget for the fiscal year 2025 and Pakistan’s recent agreement with the International Monetary Fund for a new 37-month $7 billion loan.

The SBP lowered its benchmark interest rate by 150 bps to 20.5 per cent last month, following a record-high 22 percent rate that had been maintained for almost a year. This marked the first rate cut by the SBP in four years, as inflation started to decline.

In a poll conducted by Topline Securities, 75 per cent of the market participants expect the central bank to announce a rate cut, of which 60 per cent expect a rate cut of 100 bps.“We are also of the view that the SBP can lower the rate by 100 bps to 19.5 per cent in its upcoming meeting due to receding inflation. We estimate inflation to clock in at 11 percent in Jul 2024,” said Topline Securities in a note.

“With the rate cut of 100bps, the real rate based on Jul 2024 inflation expectations of 11 percent, would be around 850bps, providing enough room to the central bank to absorb any external shock or lagged impact of budgetary measures,” it said.

“We expect the policy rate to decline by 450-550 bps by June 2025 to 15-16 percent with real interest rate assumption of 300-400 bps as we expect inflation to average 13-13.5 percent in FY25,” it added. In last briefing, the SBP mentioned that, room for further cut in interest rate will be dependent on post budgetary and IMF measures assessment.