October 5, 2002	Saturday	Rajab 27, 1423

KARACHI, Oct 4: The demand for private sector credit is bound to show in the coming weeks mainly through cotton financing but confusion still prevails over a possible cut in interest rates.

Finance Minister Shaukat Aziz has been saying lately that he foresees a single digit interest rate but the SBP keeps sending signals of interest rate stability. This has completely confused the banks and forced them to do things that has finally forced the SBP to warn them against falling prey to rumour-mongering.

Two senior officials of the State Bank issued this warning at a meeting of primary dealers or seven selected banks that sell government securities in the inter-bank market on behalf of the SBP.

The central bank was represented by Economic Advisor Dr. Abdul Naseer and Executive Director of Exchange & Debt Management Department Farhat Saeed. The banks whose treasurers were present at the meeting included (i) National Bank (ii) Habib Bank (iii) Union Bank (iv) ABN Amro (v) Standard Chartered (vi) Citibank and (vii) American Express.

“The officials told the banks that there was no move for an interest rate cut and that banks must refrain from speculative bidding in T-bills auctions on rumours (of rate-cut),” said a source privy to the meeting. But another source told Dawn that whereas one senior SBP official tried to defuse rumours of rate cut the other one reminded banks that central banks never tell the market when exactly the interest rate would change. So some participants of the meeting clung to their view that a rate-cut was still likely but for others this possibility vanished—at least for the time being.

The sources said the central bankers asked the banks to discipline themselves—and do not force the SBP to sue regulatory measures to ensure that the market does not go berserk again. This was an obvious reference to the past few auctions of treasury bills in which the banks had come up with very large bids without having that much liquidity available.

The bankers suggested to the SBP that this problem could be addressed if the SBP calls bids for only one tenure. The SBP officials listened to this but they would not make any comment.

In the meantime discounting shot up to around Rs23bn on Friday mainly due to reserve averaging. Throughout this week the banks have continued to resort to heavy discounting because of an ongoing liquidity crisis that started after the banks had made over-investment in T-bills.

Some bankers feel that despite the interest rate stability signals coming from the SBP through T-bills auctions there is possibility of rate-cut to create demand for the private sector credit. But others feel that fear of inflationary trail would refrain the central bank from doing so. That is why the bankers who attended the SBP meeting on Friday failed to get clearer on the future course of monetary policy though the central bankers made an attempt to assure them that there is no need to panic.

“The market should pick up signals of interest rate stability from the cut-offs we maintain at T-bills auction,” one of the SBP officials was quoted as saying.