Mark-up rate may be raised ahead of IMF deal

KARACHI - Coming to the expectations of the money market experts, the State Bank of Pakistan is likely to increase benchmark interest rate further by at least 100 basis points, to 14 percent within next few weeks amid high return in T-Bill.

The SBP is eyeing to raise policy discount rate by 200bps to 15 percent till March 2009 prior to the approval of IMF economic support programme, an analyst told The Nation on Thursday.

Contrary to the anticipated rise in discount rate, some experts foresee interest rate declining from second quarter of calendar year 2009 as CPI inflation is expected to be around 20% in FY09 lower than current 24% (Sep 2008) on account of economy boosting measures to be taken by the government soon. Inflation may decline sharply from April 2009 as commodity prices have declined sharply. On a YoY basis CPI may post a substantial fall (below 15%) after March 2009.  

It is important to mention here that as on November 05, 2008, State Bank had enhanced the 3-month cut-off yield by 97bps to 13.5 percent in its market treasury bills auction which showed that there is a high probability of further increase in the interest rate by upcoming few weeks.

According to Mohammad Sohail analyst at JS Research, despite reduction in discount rates in many regional countries, SBP is planning to tight more its prevalent monetary policy stance by changing 200bps with aim to controlling inflation, reducing govt's central bank borrowing and stabilizing the local currency which for the central bank are more important factors than the overall growth to be achieved in the short run.

The SBP expected decision of soaring interest rate further would put the industrial sector and capital market in a very vulnerable position. Hence this move will add the problems to the industrial borrowers and stock market investors. It is worth noting that industrial sector is already under the saviour crisis on account of hike in cost of running business.

A study conducted by Economic Intelligence Unit revealed that Pakistan's benchmark interest rate is the highest in the world as since August 2007, State Bank increased its interest rate by 200bps to 13 percent from 11 percent in FY07.

Within next few weeks Pakistan will be getting the much-needed IMF funding to stabilize the worsening balance of payment situation. As a result of this funding, Pakistan may get IMF facility of US$6-8bn (4-5 times Pakistan's annual quota) over 18-24 months.

A contentious point during just concluded negotiations between IMF and Pakistani officials has reportedly been IMF's insistence to increase interest rates in order to bring them closer to core inflation, while helping to stabilize the currency in the short term. Recent move by State Bank of Pakistan (SBP) to increase 3-month T-bill cut off yield by 97bps gives the signal that a rate hike is on the cards and SBP can increase discount rate by a minimum of 100bps immediately and a total of 200bps until March 2009. Recent hikes by Iceland (600bps) and Hungry (300bps) prior to signing for IMF program supports this view.

"Theoretically one can buy T-Bill yielding 13.5% and finance it through central bank discount window at 13%, assuming no change in policy rate for 3 months. Based on last 10 years data there were only 3 occasions when 3-month auction cut-off yield was higher than the discount rate. And in all those occasions discount rate was increased within 2-6 weeks. Moreover, in last 10 years discount rate on an average was 240bps higher than 3-month T-bill yield", analyst said.