SBP conducts longer-tenor OMO to cool secondary market rates

KARACHI: State Bank of Pakistan (SBP) on Friday injected liquidity into the money market for an extended duration through an open market operation (OMO), making it a second move in a week to ease liquidity constraints of banks and bring down secondary market rates.

The central bank provided banks with total liquidity of Rs1.475 trillion where Rs692.2 billion was accepted for seven days at 13.79 percent, while the remaining Rs783.3 billion at 13.83 percent for 63 days, the SBP’s OMO result showed.

The central bank conducted a long-period OMO on May 27, 2022. It also held Shariah-compliant Mudarabah-based OMO, pumping a total of Rs595.7 billion in liquidity into the Islamic banking institutions.

SBP injected Rs301 billion funds into the Islamic banks for seven days at 13.81 percent. The central bank provided them with the liquidity of Rs295 billion for 63 days at 13.87 percent.

Analysts said the cut-off rates on Market Treasury Bills started declining as the SBP continued efforts to calm the money market.

As a result of announcing another 63-day OMO today, the yield on a three-month tenor T-bill in the secondary market has currently fallen 15 basis points to 14.80 percent, said Fahad Rauf, head of research at Ismail Iqbal Securities.

“However, a large gap exists between the policy rate and three-month T-bill yield, which indicates market's expectations of further hike and the government’s need for funds considering large maturities in the next two auctions in June.”

The yields on the short and long-dated T-bill jumped to 15 percent in the last auction held on Wednesday after a rise in inflation reinforced expectations for a further hike in interest rates.

SBP raised the policy rate by 150bps to 13.75 percent. The next policy review is due on July 7.

Investors expect inflation to increase further in coming days on adjustments such as rolling back of energy subsidies required for resumption of the International Monetary Fund (IMF) programme.

The consumer price index (CPI) inflation rose to a 28-month high, clocking in at 13.76 percent in May led by soaring food and fuel prices. However, inflation numbers are slightly better than market expectations of 14-14.5 percent.

SBP, in its latest monetary policy, noted that since the last meeting held in April, money market yields had risen significantly which were supposed to be aligned with the policy rate.

The central bank also mentioned in the post monetary policy analyst meeting that if secondary market yields didn’t normalise, it could use other monetary policy tools such as OMOs and outright purchases to address any anomaly.