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Discount rate to be cut by 150-200bps

KARACHI: State Bank of Pakistan reduced yields on treasury bills sharply on Wednesday, giving a signal that a large interest rate cut lay ahead.

State Bank is to announce next monetary policy on July 25. It is widely anticipated that the central bank will cut the key policy discount rate by 1.5-2 percentage points. The yield on six-month paper declined to 11.5151 percent from 12.4385 percent, a difference of 92 basis points. The return on one-year paper fell to 11.5392 percent from 12.2418 percent, a decline of 70 basis points. The yield on three-month paper dropped to 11.4161 percent from 12.9775 percent, a fall of 156 basis points.

Banks, flush with liquidity owing to absence of demand for loans from corporate sector, offered Rs 151.592 billion, but the central bank raised Rs 57.207 billion. The pre-auction target was Rs 45 billion.

"This confirms that discount rate is going to be cut," said a treasury official at a large local bank. "We expect a cut of 150 to 200 basis points. He said banks were not receiving any demand for money from corporate sector, as there was no growth in gross domestic product. Banks in this situation had no choice but to lend to the government even at lower rates, he said. Banks offered Rs 100 billion for one-year paper, as they wanted to invest in long-term papers because of expectations of decrease in interest rates. Central bank, however, picked only Rs 35 billion through one-year paper. It raised Rs 11 billion and 10 billion through six-month and three-month papers, respectively. staff report

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