KARACHI, Nov 8: The banking industry expects ‘another hike’ of up to three per cent in the interest rate amid indications of a possible agreement with the International Monetary Fund.

The fears about the likely hike were mounting in the banking industry as Iceland had to push up its lending rate by six per cent to 18 per cent, from 12 per cent, in one-go after securing loan from the IMF.

However, the fear among the banks is different than the fears of industries.

The banks are already under the influence of global meltdown of financing system sinking many banks and forcing industries to take sharp cut in their production.

“If the interest rate goes up further it will force many banks to opt for bankruptcy,” said a senior banker who requested anonymity.

Banks have been warning the State Bank of Pakistan that any sudden rise in interest rate could be disastrous as they are still struggling to stay afloat despite severe liquidity scarcity amid sharp economic slowdown.

Economists see zero global economic growth for next year, if not negative. “The global recession will hurt our exports adding more pressure on balance of payments of the country,” they warn.

The trade imbalance has already chewed 70 per cent of the foreign exchange reserves of the country.

“During the first nine months of 2008 the banks have shown good growth in their net interest income, but any further hike in interest rate will slowdown the economy forcing several banks to bend down against the situation,” said a treasurer of a small bank.

The State Bank in its latest auction of Treasury bills jacked up the cut-off yield on the three-month paper to 13.5 per cent, which is a higher than the 13 per cent discount rate.

Analysts, at JS Research in their recent report based on last 10 years data, said that there were only three occasions when the three-month T-bill’s cut-off yield was higher than the discount rate and in last 10 years discount rate on an average was 240bps higher than 3-month T-bill yield.

”The current benchmark discount rate failed to control the inflation which means that further increase in the interest rate would not for inflation but for the slowdown of the economy,” said the treasurer.

Bankers feel that the slowdown of economy with higher interest rate will have a long-term negative impact on the economy while coming out of this possible situation seems extremely difficult.

”We will loss the gain we made during the last five to six years and destroy future opportunity at least for next 10 years,” he said.

All indications coming out of government sources and the stagnant situation regarding the falling foreign exchange reserves, suggest that the country is close to have a deal with the IMF.