The SBP has picked more than the target in the latest T-Bill Auction and that is without any change (apart from 5 bps increase in 6M-paper). This implies that largely speaking both market and government are expecting no change in the upcoming policy review on 28th May. The market has participated higher amounts at prevailing rates and the government is not showing any hesitance in picking. Nonetheless, bonds and papers secondary market yields have come down by 23 bps to 66 bps between 6M and 10Y papers in the last two months due to expansionary posture by the new FM and increase in COVID cases.
The government picked Rs575 billion in T-Bills Auction earlier this week against the target of Rs500 billion. Rs209 billion are fetched in 3M papers at 7.35 percent (no change from the previous auction), Rs342 billion in 6M paper at 7.60 percent (5 bps higher than last auction) and Rs22 billion in 12M at 7.69 percent (no change). Market participation was a little over Rs1 trillion (Rs552 bn plus in 6M, Rs452 bn in 3M and Rs92 bn in 12M).
The government did not let the 3M paper yield to increase and picked less amount in it and got handful of 6M papers. Interestingly, the market is not yet interested in bidding for 12M and within what is in offing, the government is not at all keen to jack up rates. This implies that there are uncertainties about the future course of policy rate and the market is playing wait and see.
Nonetheless, SBP has issued new Primary Dealer (PD) regulations – for details read “A welcome change to primary dealer rules”. The new rules are applicable from 1st July 2021. After that every PD must bid at least 5 percent of target amount in every tenure. This will let SBP and analysts know what the market is thinking and would help in price discovery if the government picks decent chunks at each pocket.
With yields down, market is expecting no change in the upcoming policy review. The question is how long can this negative real interest rate regime continue? Inflation is up around the world due to increasing commodity prices and the developed world reopening as mass vaccinations pick up. The US has not indicated any rate increase anytime soon. This could give breather to the emerging markets.
The Pakistan market is taking a breather too. The wait and see policy seems likely for the short run. However, rising oil prices are challenging SBP’s medium term inflation target of 5-7 percent. In the last policy minutes, SBP clearly mentioned that – “…In case of an oil price shock in FY22, [it suggested] raising the policy rate to bring headline inflation back towards the medium-term target range”.
Oil prices are flirting around $65-70/barrel. The demand is only going to pick up in the post vaccinated world. If the prices remain and persist above $70 in the next few months (or quarters), then the tightening stance at home is inevitable. However, the oil supply side is to be jacked up too in the post pandemic world.
The other important factor is the upcoming budget in Pakistan. FM is saying that it would be pro-growth. There are high chances of upward revision in the minimum wage and wages of federal and provincial employees. The private sector may follow suit. This may trigger wage-price spiral – it is something SBP sees very closely. This could put pressure on inflation and SBP may have to act accordingly.
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