Secondary market yields, KIBOR surge after MPC decision

March 11, 2025 (MLN): In response to the State Bank of Pakistan's (SBP) Monetary Policy Committee (MPC) announcement yesterday, yields in the secondary market experienced a noticeable surge across all tenors with Karachi Interbank Offered Rate (KIBOR) rates also recording an upward movement.

In the secondary market, the 3-month, 6-month, and 12-month Pakistan Revaluation Rates (PKRV) rose by 16 basis points (bps), 21 bps, and 16 bps, respectively, closing at 11.86%, 11.78%, and 11.71%.

Longer-term instruments saw more pronounced changes, with 3-year, 5-year, and 10-year bond yields climbing by 34 bps, 24 bps, and 7 bps to reach 12.13%, 12.56%, and 12.38%, respectively.

KIBOR rates across all tenors also reacted to the MPC decision, increasing by 16 to 41 bps on a day-on-day (DoD) basis.

Specifically, the 3-month, 6-month, and 12-month KIBOR rose by 19 bps, 22 bps, and 16 bps, respectively, settling at 12.05%, 12.00%, and 12.13%.

This change came in response to the MPC's decision to maintain the policy rate at 12%, effective March 11, 2025— contrary to market expectations for an increase.

The Committee justified its stance by citing core inflation which remained sticky at an elevated level and thus uptick in food and energy prices may lead to an increase in inflation.

Meanwhile, economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators. Moreover, the MPC viewed that some pressures on the external account have emerged due to rising imports amidst weak financial inflows.

On balance, the MPC assessed the current real interest rate to be adequately positive on a forward-looking basis to sustain the ongoing macroeconomic stability.

The Committee noted the following key developments since its last meeting. First, the current account turned into a deficit of $0.4 billion in January 2025 after remaining in surplus over the past few months.

This, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP’s FX reserves.

Second, large-scale manufacturing output declined during H1-FY25, despite a substantial m/m increase of 19.1% in December 2024. Third, the shortfall in tax revenues from the target widened further in January and February. Fourth, both consumer and business sentiments improved during the latest waves.

And lastly, uncertainty has increased significantly on the global front amidst the ongoing tariff escalations, which may have implications for global economic growth, trade and commodity prices.

In response to these developments, central banks in advanced and emerging economies have recently slowed the pace of their monetary easing.

The coming weeks will reveal whether the decision to hold the policy rate strikes the right balance in addressing inflationary pressures without disrupting economic activity.

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