After witnessing a surprising lower than estimated inflation as measured by CPI (11.56%) during the month of August, the equity and bond market players are expecting a higher cut in the interest rate due to be announced by the State Bank on the 7th of next month. According to researchers at Topline Securities, year-on-year (YoY) CPI may fall to 19-months low to range between 10.8-11.2% in the month of September. “This expected ease in inflationary pressures would advocate central bank to continue the process of monetary easing in the upcoming monetary policy scheduled on October 08,” viewed Nauman Khan. Furthermore, the government decision to part ways from the IMF would also provide domestic policy makers some room to develop a more indigenous growth oriented but risky plan to protect the nascent economic recovery. The most demanded 1-year T-bill yield has approx. eased by 28-30bps in last 1-week and this yield is down 31-33bps from last September 21. This shows that market participants have already factored in a higher than 50bps cut since yield has trimmed down by 85-89bps since the announced of last monetary policy in July, 2011. The upcoming T-bill auction on October 05, 2011 (last before MPS) would further clarify the views of bankers and investors about the quantum of discount rate cut. Though the target is still unannounced, we expect major participation to be skewed towards 1-year T-bill as investors will prefer to lock in their funds for longer duration. We expect cut-off yields to decline in the range of 20-40bps for various maturities in the upcoming T-Bill auction.
