May 17, 2024 (MLN): Pakistan’s secondary market yields have garnered significant attention and focus as following the recent auction conducted by the central bank, PKRV yields have dropped sharply by up to 62 basis points in a single day.
The 3-month, 6-month, and 12-month yields dropped by 52bps, 39bps, and 62bps, respectively.
After incorporating this change, the 12-month yield stood at 20%, marking its lowest level in over two years.
Additionally, the medium (5-year) and long-term yields (10-year) also declined by 11 and 6 basis points, respectively.
Analyzing the position of yields further in the money market, the benchmark 6-month Karachi Interbank Bid and Offer rates also dipped by 21bps in yesterday’s session.
This strong pivot in yields signals a strengthened perception of a rate cut in the upcoming meeting of the Monetary Policy Committee scheduled for June 10, 2024.
The cause denoted to this shift is Wednesday’s T-Bills auction, which saw a rush among investors to buy the 1-year bonds with bids reaching a whooping total of Rs1.13 trillion.
However, as the central bank only accepted a marginal amount of Rs77bn (6.81% of the bid), the cut-off yield for the tenure dropped by 49bps.
This was followed by the 3 and 6-month tenure bonds, which recorded a decline of 6bps and 10bps, respectively.
Read: T-bills yields fall by up to 49bps
Perceptions for a transition in the country’s Monetary policy build further owing to a significant deceleration in inflation numbers.
The favorable base effect and reduction in food prices eased the consumer price index (CPI) for April 2024 to 17.3% YoY. On a monthly basis, the CPI recorded a decline of 0.4%, marking the first decrease since June 2023.
This further improved the real interest rates, which transitioned to the positive zone in March 2024, after a hectic period of over 3 years.
Read: CPI inflation falls to 17.3% in April 2024
Going ahead, the inflation reading is expected to scale back further as the weekly Sensitive Price Indicator (SPI) is already down for the fourth consecutive week.
Hence, the market now strongly believes that the upcoming MPC meeting is the appropriate time for the central bank to shift towards monetary easing and conclude its long and aggressive fight against inflation, which resulted in the policy rate reaching a record level of 22% in June 2023.
Before the last MPC meeting, Arif Habib, the founder of the Arif Habib Group, called for an immediate reduction in interest rates to bolster the economy by easing borrowing pressures on the business sector.
Exporters and business representatives have also voiced their concerns on key issues such as liquidity challenges and high business costs arising from policy rate being fixed at a record high level.
In order to place the economy and its segments back on the path of growth, the central bank might have to end its tightening cycle as the industry now aims to recover.
However, the International Monetary Fund (IMF), with which Pakistan is currently seeking a larger and longer agreement, has underscored the need to maintain a tight monetary stance.
In response, Pakistan has also agreed that any loosening of the policy stance should be supported by further evidence that inflation remains on a declining trend, pass-through remains contained, and possible exchange rate pressures from FX market normalization are limited.
Read: IMF applauds SBP’s decision to maintain policy rate, urges continued tight monetary policy
Thereby, the upcoming inflation numbers for May will further assess the market in gauging the upcoming decision regarding the monetary policy in the country.
Copyright Mettis Link News
Posted on: 2024-05-17T12:33:06+05:00
