Discount rate likely to be cut to 12pc

KARACHI - The State Bank of Pakistan (SBP) is set to announce new monetary policy for the first quarter of the current financial year 2009-10 on 25th of this month, said Syed Wasimuddin, Chief Spokesman of SBP said on Monday. The Board of Directors of central bank will hold a meeting on the proposed day to conduct the policy review for July-September quarter FY10. Thus, after making a through assessment on the trend and growth of monetary aggregates including inflation, money supply growth, governments banking and non-banking borrowings from SBP, private sector credit growth and foreign exchange reserves position, the central bank will issue its stance about monetary policy statement on its discount rate. SBP will further share it findings with media on the state of macroeconomic indicators during May- July 2009. It is important to note that banking and financial experts are projecting that SBP may further cut its policy discount rate by 100 to 200 basis points, to 12 per cent in the upcoming monetary policy. The capital market experts are looking for 300 to 400 basis points cut in the discount policy rate but they feel that the SBP might not go beyond 200 basis points cut in mark-up rate. According to M. Imran, Research Analyst at First Capital Equities Ltd (FCEL), the forthcoming monetary policy for Q1-FY09 is probably to witness a slight decrease of 200 BPS cut in interest rate on expectations of stubborn movement in core inflation rate/index and a potential risk of volatility in exchange rate which could push the central bank to announce a slower reduction in the policy rate. He also opined that current reversal in commodity prices might magnify the adverse balance of payment situation for which SBP would prefer to ease monetary policy a bit. Meanwhile, Mohammed Sohail Chief Executive, Topline Securities Pakistan said that the first Treasury Bill auction of the new fiscal year will be held on July 15, 2009. The auction is crucial ahead of the quarterly monetary policy expected in next couple of weeks. Moreover, the rally in government bonds (PIBs) continues as banks have been aggressively investing in these papers amid low credit demand in the economy. Due to extra liquidity the lending benchmark 6-month KIBOR has fallen to 13-month low of 12 per cent. The fall is also in line with CPI, used to measure inflation in Pakistan that slowed down to 13.13 per cent after a gap of 16 months. In the first six months of calendar year 2009, banks investment has increased abnormally by 38 per cent whereas credit growth was just 1 per cent proving the fact that all deposit mobilisation is diverted towards government securities amid rising risk aversion, he said that with ample liquidity in the money market these days, bankers will again bid aggressively in the auction that has a target of Rs45b and in spite of the fact that a huge quarterly target of Rs325b has been set by the government. The liquidity in the system will also reduce the gap between short term and long-term government papers which in the recent past created a non typical yield curve where one year paper was traded at a higher yield than the 10-year bond. We expect a cut off of 11.50-11.75 per cent for 1-year T-Bill, a decline of 50-75bps from last cut off yield of 12.25 per cent. In the previous auction, 1-year paper cut off yield came down by 100bps. He said a smaller PIB target of Rs30b for the first half of FY10 has already created demand for this paper in the secondary market. This has resulted in most traded 12 per cent 10-year bond that matures in Aug 2018 to trade as low as 11.45 per cent. This 10-year yield is seen after a gap of almost 17 months. In the last six months, 10-year paper yield has dropped by 530bps to reach close to 11.5 per cent. This bond has already rallied almost 25 per cent in last six months thereby providing banks some gain on treasury operations at a time when lending activities are not generating good returns, he added.

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