The lending rate of commercial banks for offering budgetary support to the government soared on Wednesday after inflation shot up to a 21-month high in November.

The sharp increase in commercial banks’ lending rates for three, six and 12-month treasury bills indicates that they expect the central bank to make another aggressive hike in the benchmark interest rate on December 14.

“Cut-off yield (banks’ lending rate) increased by 228 basis points for three-month T-bills to 10.78% compared to 8.5% in the previous auction held on November 17,” Topline Securities reported, citing the central bank’s results for the latest T-bills auction held on Wednesday.

According to the Pakistan Bureau of Statistics (PBS), the inflation soared to a 21-month high at 11.5% in November against market expectations of 10% inflation for the month. The inflation spiked three percentage points from 9.2% in the prior month of October.

The benchmark interest rate remains a tool available with the central bank to control inflation. The State Bank of Pakistan aggressively increased the rate by 1.5 percentage points to 8.75% on November 19.

The government raised Rs504 billion to finance budget deficit through the auction of T-bills. It had fixed the target of Rs750 billion for the auction.

The State Bank of Pakistan (SBP) is scheduled to hold a meeting to announce the next monetary policy statement on December 14. Prior to release of inflation number for November, the market had expected a surge of 100-125 basis points in the benchmark interest rate in December.

Apart from the high inflation reading, market talks suggest that Pakistan’s import bill has reached all-time high of around $7.5-7.8 billion in November compared to the recent record high of $6.6 billion witnessed in September. The government is yet to release the import numbers for November.

“If the import bill comes close to the speculated numbers, then the country’ current account deficit would widen by a massive over $2 billion in November,” Ismail Iqbal Securities Head of Research Fahad Rauf.

The ballooning current account deficit may extend the current cycle of depreciation of rupee against the US dollar which would lift the inflation reading of Pakistan.

Pakistan’s central bank has kept its projection for inflation unchanged at 7-9% for full fiscal year 2021-22, according to November’s monetary policy statement. It, however, cautioned that inflation could exceed the upper limit of the projection laid down by SBP.

The inflation may surge past 9% in full fiscal year 2021-22 in the wake of the significant increase in global food and energy prices that the country imports to meet the local demand. Moreover, the likely increase in power and gas tariff by the government to implement the conditions laid down by the International Monetary Fund (IMF) would spark additional inflationary pressures.

Rauf said that his research house estimated inflation at 11% for full fiscal year 2021-22. “The month-on-month inflation reading may peak at around 13% over the next few months.”

The spike is expected due to increase in cost (fuel component) of power production and likely surge in power and gas base tariffs by the government in the near future.

The oil price in the international market is expected to drop further in the wake of contraction in demand amid outbreak of Covid-19 Omicron variant in Europe, US, Japan and Singapore.

T-bill auction results

The T-bills auction results suggest that the government has raised Rs338.4 billion by selling three-month T-bills at 10.78% yield against an offer of Rs423.4 billion.

It acquired another Rs111 billion by selling six-month T-bills at a yield of 11.5%. Banks had offered Rs201 billion.

The government raised Rs55 billion by selling 12-month T-bills at 11.51% against an offer of Rs125 billion.

The bond (T-bills) yields in the secondary market remained stable on Wednesday.

The cut-off yields on T-bills “are up by 79-100bps from the prevailing secondary market yields,” according to Topline Securities.

Published in The Express Tribune, December 2nd, 2021.

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