KARACHI (December 25 2002) : The State Bank of Pakistan on Tuesday slashed the rates on one-year treasury bills by 247 basis points, sending signals to banks and other financial institutions to cut their interest rates to help achieve the economic growth target fixed for the current fiscal year.
The central bank conducted auction for three-month and one-year treasury bills after a lapse of over three weeks and, in between, sold six-month treasury bills through two auctions to fix the refinance rate for December.
The Bank normally used the average of previous six-month treasury bills cut-off yields to set the rate.
The SBP received bids worth Rs 50.804 billion against the target of Rs 15 billion fixed for three-month and one-year treasury bills.
It sold, after a long time, the three-month paper worth Rs 495.550 million at the cut-off yield of 3.90 percent down from 5.81 percent.
The bank sold the one-year treasury bills for Rs 18.829 billion at a cut-off yield of 4.44 percent, indicating a net decline of 2.47 percent from the last auction held in October, selling Rs 30 billion worth of treasury bills, when the cut-off yield was 6.91 percent.
The cut on Tuesday was possible after the central bank in November slashed the discount rate on lending by 1.5 percent to a record low of 7.5 percent.
According to an analyst, it was a clear signal for the banks to reduce their lending rates they charge with business houses and industrial units.
The weighted average lending of all banks has already come down to 11.48 percent in the four months ended on October 31, 2002, from 13.12 percent of last fiscal year.
“Following this cut, and on rates quoted for the six-month treasury bills, it is indicated that the borrowing cost would be cheaper and the industry would get funds from the banks on lower cost, to help in boosting their profits,” an analyst said.
He said that the pickup in the private sector borrowing at cheaper rates is a must for reviving investment and production to lift the sagging economy.
The lower interest rates would help companies at private and public sectors to re-profile their expensive debts to cheaper ones, reducing their financial costs, and making their balance sheets healthier, he said.
The state-controlled banks cut the rate by 1.31 percentage points to 12.28 percent, private banks by 1.68 percentage points to 12.75 percent, and foreign banks 2.31 percentage points to 9.34 percent.
''Banks will further cut the lending rate, help industry to reduce their borrowing cost and go for expansion,'' another analyst said.
He said this was done as the inflation rate is under control to 3.59 percent and exchange rate is stable, helping in easing the monetary policy.
The credit off-take is likely to pick up in the coming months from the private sector and exporters which, according to last figures was less than the market expectation, as the target for the fiscal year is Rs 90 billion.
The country expects that the economy would grow by 4.5 percent in 2002-03 from 3.6 percent of last year, hurt because of drought, war in Afghanistan and tension with India.
A leading money market trader said that the amount received for the auction showed that liquidity position is quite comfortable and now the next target is six-month treasury bills auction, expected to held next month.
Since the discount rate cut, the yield on 10-year bond fell by 3.95 percent to 5.95 percent and on 5-year bond by 2.65 percent to 5.20 percent, while cut-off yield on six-month treasury bills declined to 4.45 percent from 6.37 percent.
Moreover, the central bank also cut the coupon rate on three-, five- and 10-year Pakistan Investment Bonds by two percentage points to 7 percent, 8 percent and 9 percent, respectively.
The bank is to conduct an auction of these bonds on December 31, and the target is Rs 5 billion.