In a noteworthy development, the government has taken a decisive step by reducing the cut-off yields on treasury bills during its latest auction, signaling a potential shift in interest rate trends. The State Bank of Pakistan (SBP) reported a significant cut of up to 50 basis points in T-bill returns, foreshadowing a possible decline in future interest rates, reports WealthPK. Unlike the previous trends, the auction saw the highest bids for 12-month papers, indicating investor anticipation of a forthcoming cut in the SBP policy rate during the next monetary policy review. Although total bids reached an impressive Rs4 trillion, with over half concentrated in the 12-month tenor, the government fell short of the auction target, even below the maturing debt. This move comes in light of expectations for a slowdown in inflationary pressures, driven by improved commodity supplies and a downward price trend in global markets. October's Consumer Price Index (CPI)-based inflation slowed to 26.9%, down from 31.4% in the previous month, reinforcing speculation of a potential interest rate cut in the upcoming review.

Talking to WealthPK, Hamid Haroon, former economist at the World Bank, said the current high-interest rate environment had deterred domestic investors from utilizing capital for new ventures or expanding the existing businesses, posing a challenge to economic growth. Moreover, the government faces the burden of allocating a significant portion of budget to debt servicing, limiting development spending, and contributing to lower growth and higher unemployment. During the T-bill auction, only Rs1.161 trillion was picked against the Rs1.5 trillion targets. The maturity amount for the auction day was Rs2.073 trillion, indicating that the government raised less than required to cover its maturing debt. Hamid suggested that this scenario supports the idea of an imminent reduction in interest rates in the next monetary policy. Notably, the government successfully raised Rs529 billion for 12-month papers, with investors expecting an interest rate cut and showing willingness to invest in the long-term tenor.

The cut-off yield for the 12-month papers was reduced by 50 basis points to 21.5%. In addition, Rs408.7 billion was raised for 3-month papers at 21.49%, with a 45-basis points reduction in the cut-off yield. The government also secured Rs40.7 billion for the benchmark 6-month T-bills at 21.49%, reflecting a 49 basis points cut in the rate. Furthermore, Rs182.2 billion was raised through non-competitive bids. Hamid said the success of this strategy hinged on a delicate balance. While stimulating economic growth is essential, it must be accompanied by vigilant monitoring to avoid any adverse effects on inflation or fiscal stability. The government's commitment to prudent fiscal management will be crucial in navigating these complexities. This strategic move by the government not only aims to navigate current economic challenges but also to position itself for potential growth by aligning with the changing market dynamics and inflationary trends, he said.

Credit: Independent News Pakistan (INP)