June 22, 2006	Thursday	Jumadi-ul-Awwal 25, 1427

KARACHI, June 21: Banks have refrained from handing over huge inflows of liquidity to the State Bank, which signals that they are looking for an increase in interest rates.

Three major banks — National Bank, Habib Bank and Standard Chartered Bank — did not participate in the bidding for treasury bills auctioned by the SBP on Wednesday.

The banks will receive a liquidity of Rs56 billion on Thursday but they offered just over Rs14 billion to invest in the T-bills. The SBP picked up only Rs5.4 billion without making any change in T-bills rates.

Analysts said the holding of liquidity by banks was a clear signal to the SBP for higher discount rate.

Dealers said the SBP might conduct the open market operation (OMO) to suck up the liquidity. However, they said the central bank was likely to take vindictive step and supply massive liquidity in the market which would sharply reduce the money rates. Last month same thing happened and the SBP supplied huge liquidity into the system which plunged the rates later and all liquidity was sucked up through the OMO.

The analysts said the punishment was not a solution to the problem and the interest rates should see a rise in near future. “The government has come out with high spending budget and prices have been reduced through subsidies. The government also managed to bring down inflation,” said an analyst.

In reality inflation was much high and demand for higher interest rate looked justified, said the analyst.

Banks have been facing liquidity crunch for last three weeks and have been frequently approaching the SBP discount window. The discount rate is nine per cent and the outflow of liquidity compels the banks to get money at nine per cent.

The SBP offers rates below the discount rate, which the banks say is a loss. They give their money to the SBP at below nine per cent but get the same at nine per cent. “Why should we continue to book losses? It is better to remain liquid and let the SBP decide to revise the discount rate,” said a treasurer at a local bank.

The tight monetary policy followed by the SBP resulted in persistent liquidity shortage throughout the year that compelled the banks to get money through the discount window.

The treasurer said the SBP could not continue with this rate as inflation was not as low as the old basket of inflation showed. “The government’s spending plan for the next fiscal year will further increase inflation.”

Banks know that the government would require huge money from the banking system to meet its spending. The banks are now in a position to increase pressure for higher interest rates. Higher interest rates would suddenly increase government’s debt servicing but reduce outflows of credit towards the private sector.