July 05, 2007	Thursday	Jamadi-us-Sani 19, 1428

KARACHI, July 4: While the State Bank is likely to announce new monetary policy this month, banks have shown confidence over the stability of interest rates as they have invested huge money in one year treasury bills.

The treasury bills auction held here on Wednesday also reflected the confidence over the central bank which had been indicating that the monetary policy for the current fiscal would remain same with no further tightening.

As per markets’ expectation the State Bank did not change the cut-off yields on the treasury bills of all the three maturities.

Over 95 per cent money was invested in one year papers totalling Rs53.986 billion followed by Rs478 million in six months and Rs1.960 billion in three papers.

The central bank picked up total Rs56.426 billion against the combined auction target of Rs45 billion due to presence of huge liquidity in the banking system. The total bids offered were of Rs84.418 billion.

Market punters said there would be no surprises in the monetary policy, which is likely to be announced by the end of this month, as the central bank had already indicated continuation of the current tight stance.

However, the analysts said that it was the government’s expansionist economic policies which resulted into excess liquidity in the market. The SBP had no other option but to carry on with the tough monetary strategy.

Some analyst believed that the continuation of tight monetary policy for longer period could hurt the private sector as the purpose of checking inflation by jacking up interest rates had not worked so far. Instead it had curtailed credit offtake to the manufacturing sector due to high borrowing cost.

From May 3006 to May 2007, the average lending rates of all banks had increased to 11.32 per cent from 10.29 per cent.

The size of the economy is widening while the size of credit to private sector is not in the proportion of the economic growth which means the contribution of private sector would shrink if the tight monetary policy continued.

Despite tight monetary policy inflation continued to increase in 2006-07. Also, banks raised the lending rates. Experts were of the view that the SBP had no option but to keep pressure on supply of liquidity.