AUGUST 2012 (Graph#1)
The monetary policy was announced on 10th August 2012. According to the Monetary Policy Statement (MPS), the impact of monetary policy on interest rates and expectations about future has reduced due to the constrained conditions in the economy.
However, by seeing the yield curves for 9th and 13th August the major changes which can be observed are:
' A downward shift in the curve
' Flattening of curve for short term bonds
' Change in trend of short term bonds
' Steepening of curve for long term bonds
One of the good sign seen after the announcement of monetary policy was that the yield curve for short term bonds which was following a slightly downward trend on 9th August, shifted to a rising trend on 13th August. The previously inverted yield curve was a signal that the economy will face a slowdown.
Moreover, the Governor State Bank, Yaseen Anwar announced a cut of 150 basis points in the policy rate, effective from August 13, 2012. This was done because the SBP's wanted to give more weight to the state of private sector credit and investment in the economy. This reduction in discount rate would help achieve this target.
Another important change observed was the flattening of the yield curve for the bonds with maturity of 1 week-6 months. This change can be contributed to the decelerated pace of inflation from the period of May 2012 to August 2012. This fall in inflation led to the yield curve becoming steeper, as people were become a little indifferent while choosing the bonds with maturity of 1 week -6 months.
However, this moderation in the inflation rates was due to a fall down in real private investment, hence being an indicator of a structurally weak economy. The decline in inflation has also created strengthen market expectations for a downward revision in SBP's policy rates. There has been a noticeable reduction in the yields on the government securities in secondary market and KIBOR.
Furthermore, the other half of the yield curve which is for the long term maturity bonds saw a steepening effect. The spread between 3-year bond rate and 9-month T-bill rate increased. The consequence of this relatively steepened curve may reflect expectations of future increases in short term deposit rates. . However, according to the SBP statement, this increase was mainly due to a relative increase in supply of long term securities rather than expectations of rising inflation.
JUNE 2013 (Graph # 2)
The monetary policy was announced on 21-June-2013. The major change observed in the yield curve the day before (20-6-13) and after (24-6-13) was downward shift. The KIBOR rates for all bonds ranging from a maturity period of 1-week to 3-years fell drastically within this short time.
The SBP was reducing the discount rates to regulate the economic conditions. This decrease in the discount rate caused the amount of lending made by banks to increase, hence increasing the money supply. According to SBP, the reducing inflation and provision of low private sector credit, were the reasons for this step. The policy rate was reduced by 50 points, with effect from 24th June.
However, the yield curve for 24th June shows that the yield for short-term bonds, started following a downward trend. As the SBP MPS showed, this was due to the uncertainty about better future outlook of business cycle.
Moreover, the downward trend of yield curve of 3-month to 6-month can be justified by the findings mentioned by SBP in the MPS. The Government's decision to increase GST and electricity tariff, have heightened the risk of an increase in inflation.
In conclusion, the SBP's action to reduce policy rates can be assumed that it will be positive for the economy. By paying focus on controlling the inflation, the SBP can improve the investment conditions in the economy.
SEPTEMBER 2013 (Graph # 3)
The monetary policy was announced on 13th September 2013. An overall upward shift was seen in the yield curve of the day before and the day after yield curves. This upward shift was due to the increase in discount rate by 50 basis points in consideration of inflationary pressures.
According to the monetary policy statement, the upward trend in money market overnight repo rate also kept the short-term interest rates mostly on a higher side including the 6-month KIBOR.
The part of the curve for bonds of 1-week to 6-months has experienced a positive butterfly shift, i.e. the curvature has reduced. On the other hand, the interest rates on long-term bonds have moved up. Hence, making the spread between 6-month and 3-year bonds, wider. The main reason for this change can be contributed to the market's anticipation of higher interest rates. This anticipation is heightened due to the conditions of the recent IMF program. The lower participation in the auction for these long term bonds was another reason for this expectation.
This scenario helps justify the increase in KIBOR rates for short term bonds. Banks preferred short-term papers because of the anticipation of increasing interest rates. Another conclusion which can be made is that, banks will harvest the benefits of the increase in the discount rate, as it will lead to enhanced profitability.
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