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Discount rate and other short term interest rates in Pakistan

In the CFA® curriculum you learn about the discount rate which is the rate at which banks borrow from the Federal Reserve (Fed).  

In Pakistan the discount rate is also called the policy rate and the SBP reverse repo rate.  The three names (discount rate, policy rate and SBP reverse repo rate) are often used interchangeably in the press. In September 2010 the policy rate was increased from 13.0% to 13.5%.  This means that if a bank takes an overnight loan from SBP it pays an annualized rate of 13.5%. 

The SBP repo rate is the rate at which at which banks deposit their end of day excess cash with SBP on an overnight basis.  In September 2010 the SBP repo rate was 10.5%.  Over the last one year SBP has maintained a 3% spread between the reverse repo and repo rates.

When the policy rate changes (as it did in September 2010), this has a direct impact on other short term interest rates such as KIBOR and treasury bill yields. 

KIBOR stands for Karachi Inter Bank Offer Rate.  This is the rate which large banks make short term loans to each other. 

The government of Pakistan borrows from scheduled banks through fortnightly auctions of market treasury bills (MTBs).  MTBs have durations of 3, 6 and 12 months.  On 22 September 2010 the yield on the benchmark 6-month treasury bill was 12.85%. 

 

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