Monday was a turbulent day in the bond markets of Pakistan. There was a lot of confusion amongst the bond market traders regarding the exact messages coming out of the State Bank of Pakistan’s (SBP) bi-monthly monetary policy statement (MPS). SBP announced their policy decision regarding interest rates on Friday (8-Feb-2013) evening and Monday was the first trading day post-MPS announcement. In the intervening weekend there were articles published in some newspapers speculating a material change in important policy stances of SBP. One of the key roles of any central bank is to manage the market expectations and ensure price stability. On the face of the market confusion observed in the trading on Monday, SBP needs to make its policy stances abundantly clear instead of leaving it to speculation by vested interests.
The confusion amongst bond traders manifests itself clearly in what happened in the PIB (Pakistan Investment Bond) and T-Bill market on Monday (11-Feb-2013) where yields saw significant volatility. The following line in the MPS regarding Open Market Operations (OMOs) caused a lot of the concern – ‘However, a gradual and consistent decline in the level of these injections (OMOs) would be required if inflation starts to increase again, as has been the case in the last two months’. Leading newspapers used this statement as a major State Bank policy shift and concluded that this was the beginning of monetary tightening. The other action of SBP of narrowing the interest rate corridor by 50 bps was perceived by some as further confirmation of the SBP policy shift.
It must be observed that the quoted SBP MPS statement focuses closely on inflationary aspects. It eludes to the last two month’s uptick in inflation numbers. However, the slightly high inflation number in January (8.07%) was a direct result of the Government of Pakistan raising wheat support price, CNG and gas tariffs and house rent in the same month. The SPI’s (Sensitivity Price Index) since the January inflation number have either been negative or close to zero. Additionally, in the MPS, the SBP has mentioned that inflation is bound to remain within 8-9% in this financial year.
Market participants were concerned that the barrage of conflicting statements was not helpful to the markets. One dealer in a leading bank’s treasury said that he didn’t know what exactly was happening and felt there was a lot of scare-mongering going on.
It is important, rather necessary, that the State Bank issues a statement to calm the markets. It must clear the air with regards to liquidity tightening and the array of articles being written in the press. Such volatility harms the money markets and reduces interest in the government’s debt. SBP needs to clear its stance and do it now.
