Treasury bill rate rises amid policy rate hike speculation

The interest rate on Treasury bills, a tool used by the government to borrow from the banking sector, increased by 30 basis points in a single day due to speculation among banks that the central bank might raise the policy rate within the next few weeks.

According to central bank data, in yesterday's auction by the Bangladesh Bank, funds were borrowed from the banks at an interest rate of 11.75% for 91-day Treasury bills. Besides, commercial banks will receive 11.90% interest on 182-day Treasury bills and 11.99% on 364-day Treasury bills. 

These interest rates on Treasury bills were 11 to 30 basis points higher compared to the auction held on 14 October.

The government typically borrows from the banking sector to cover budget deficits through 91-day, 182-day, and 364-day Treasury bills, as well as bonds with maturities ranging from 2 to 20 years. An increase in the interest rates of Treasury bills also means a rise in the government's expenditure on interest payments.

A policymaker from the central bank informed that Treasury bills worth approximately Tk9,000 crore, of various maturities, were offered in the auction for sale to banks. However, due to the commercial banks bidding at higher interest rates and the ministry's lower demand for funds yesterday, not all of the bills were sold. Out of the total bills offered, the central bank sold Tk5,500 crore worth of bills.

The last time Treasury bill interest rates were raised was in mid-May of the previous fiscal year. At that time, the interest rate for 91-day Treasury bills was increased by 25 basis points to 11.60%, the rate for 182-day Treasury bills was raised by 40 basis points to 11.80%, and the rate for 364-day Treasury bills was raised by 50 basis points to 12%. However, the interest rates for each of these Treasury bills later decreased by 10-15 basis points.

At the same time last year, the interest rates on these Treasury bills ranged between 9.25% and 9.75%. That means the rates have increased by 2.25 to 2.5 percentage points over the course of a year, primarily driven by the rise in the policy rate. Recently, the interest rates on these bills have surged again, due to a slight decrease in liquidity in the banks and the expectation of a further increase in the policy rate.

A deputy managing director of a private bank told TBS that the central bank has raised the policy rate several times in the past two months to control inflation. "We have learned that it may increase further this October. When the policy rate rises, our borrowing costs from the central bank also go up. As a result, we must take this into account when purchasing Treasury bills."

It is natural for all types of interest rates to rise when the central bank raises or signals the possibility of raising the policy rate, he added.

In September, Bangladesh Bank Governor Ahsan H Mansur announced that the policy rate would be increased several times.

"A contractionary monetary policy will be followed as long as inflation does not come under control. The policy rate will be hiked again next month," he told journalists during a briefing on September 24.

Currently, the policy rate is 9.50%. Earlier on 25 August, the central bank increased the policy rate by 50 basis points to 9% in an effort to combat high inflation, marking the third time that the key interest rate has been raised this year.

Governor Mansur had previously announced that the policy, or repo rate, would first rise to 9% and then potentially to 10% in phases.

According to Bangladesh Bank data, the government borrowed Tk47,209 crore from banks through the sale of treasury bills and bonds with varying maturities from July to September. In the same period last year, the government borrowed Tk24,474 crore from banks, reflecting an increase of approximately 93% over the year.