Pakistan’s central bank left the financial markets surprised ahead of its meeting to review the key policy rate on July 7 (Thursday), as it first sought commercial banks’ demand for liquidity for the next 74 days but rejected their requirement for around Rs2 trillion.
The State Bank of Pakistan (SBP) asked conventional commercial and Shariah-compliant banks to tell it how much liquidity they required so that it could supply the funds through the longer tenure 74-day OMO (open market operation).
“The central bank’s move of inviting bids from financial institutions … signalled the status quo in its key policy rate (at 13.75%) in its meeting scheduled for July 7,” Ismail Iqbal Securities Head of Research Fahad Rauf said while talking to The Express Tribune.
It was another longer tenure OMO among the recent 63 to 77-day OMOs. The supply of liquidity through such longer tenure OMOs is meant to reduce commercial banks’ interest rates on lending to the government.
Therefore, a traditional narrow gap could be maintained between the commercial banks’ interest rates and the central bank’s key policy rate and there would be no need to increase the key policy rate.
Later on Monday, however, the SBP announced the rejection of all bids. “The latest move has sent confusing signals to the market … that it may increase its key policy rate on July 7 for the next six weeks,” he said.
“The financial markets may react negatively to the central bank’s moves, as yields (on T-bills and Pakistan Investment Bonds – PIBs) may go up in secondary markets tomorrow (Tuesday),” he said.
“The central bank has either changed its mind during the day with regard to its key policy rate … or a communication took place between the SBP and the IMF (International Monetary Fund),” he said.
The yield (interest rate) had dropped eight basis points on a day-to-day basis to 14.90% on three-month T-bills in the secondary market before the central bank announced to reject all the bids on Monday. However, yields on all other sovereign debt securities – six-month to 10-year bonds – had gone up in the range of two to 39 basis points between 13.15-15.44% in the secondary market.
The breakup of the data suggested that the yields on shorter tenure bonds (six and 12-month T-bills) had up by two and 14 basis points to 15.17% and 15.44%, respectively, in the secondary market. The yield on longer tenure (3 to 10-year bonds) surged in the range of 23 to 39 basis points to in the range of 13.15-13.84%.
Pak-Kuwait Investment Company (PKIC) Head of Research Samiullah Tariq said the conventional commercial banks had given a huge demand for liquidity of around Rs2 trillion. “The central bank may have found the demand unjustified and that’s why it rejected the bids.”
He said the interest rate at which the conventional commercial and Shariah-compliant banks had demanded the liquidity in the range of 13.84-13.99% was stable compared to
Tariq, however, did not find any connection between the OMO exercise and the central bank’s July 7 meeting to review its key policy rate for the next six-week.
Rauf agreed that the size of the fund demanded by the financial institution was large and injection of that would have unnecessarily increased liquidity beyond the justified requirement and increased liquidity into the system unnecessarily.
He said some banks surrendered surplus liquidity to the central bank in the evening on Monday, while the central bank supplied funds to some of the institutions in need. “But the exercise has made them uncertain,” he said.
Published in The Express Tribune, July 5th, 2022.