KIBOR goes up after SBP decision to maintain interest rate

The Karachi Interbank Offered Rate or KIBOR climbed sharply on Tuesday following the State Bank of Pakistan's decision to keep the interest rate unchanged for the first time after six successive cuts.

The KIBOR is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks and to the corporate sector.

The KIBOR for tenures ranging from one week to one year increased by 16 basis points (bps) to 41bps after the State Bank of Pakistan kept the interest rate unchanged at 12%. The pause was unexpected for most market players, who according to a survey conducted by Nukta, were projecting a cut of 50-100bps. However, a few of the analysts projected an unchanged interest rate.

The central bank started easing interest rate from June last year when it was at a record 22%. Since then, it has cut the rate by 1,000bps in nine months.

The cut in interest rate materialized after inflation started easing from its peak of 38% in May 2023 to 1.5% in February.

The six-month KIBOR — the most popular one — recorded a rise of 22bps to 12% while the one year increased by 16bps to 12.13%, according to State Bank of Pakistan data.

One-week KIBOR was up by 34bps to 12.41%, two week by 37bps to 12.40%, one month by 41bps to 12.35%, three month by 19bps to 12.05% and nine month by 19bps to 12.15%.

The KIBOR had reached 21.73% in February 2024 but gradually started easing alongside cuts in the monetary policy. It touched a low of 11.72% in January.

The State Bank of Pakistan while keeping interest rate unchanged explained why this action was taken. It gave four factors which resulted in an unchanged interest rate.

First the current account turned into a deficit of $0.4 billion in January after remaining in surplus over the past few months. This, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP's foreign reserves.

Second, large-scale manufacturing output declined during FY25's first half, despite a substantial increase of 19.1% in December compared to November.

Third, the shortfall in tax revenues from target widened further in January and February.

Fourth, both consumer and business sentiments improved during the latest waves.

And lastly, on the global front, uncertainty has increased significantly amidst the ongoing tariff escalations, which may have implications for global economic growth, trade and commodity prices.

In response to these developments, central banks in advanced and emerging economies have recently slowed the pace of their monetary easing, the SBP pointed out.