KARACHI, July 5: Bankers are anticipating another cut in the State Bank discount rate i.e. the rate at which the central bank lends money to the banks for up to three days against government securities.

“We have been waiting for the rate cut since Finance Minister Shaukat Aziz said in his budget speech that steps will be taken to enable banks to lower their lending rates,” says treasurer of a large local bank. About a dozen treasurers of other local and foreign banks reached by Dawn over telephone said the same thing.

What makes their anticipation look realistic are the ground realities.

The inflation is record low at 3 per cent. The exchange rate has been stable and the rupee has gained 6.25 per cent in the inter-bank market in fiscal July/June 2001/02. And the private sector credit has been much lower than what it should have been.

The latest State Bank statistics show that the private sector credit stood around Rs25 billion as on June 15, 2001 whereas the initial target for expansion in private sector credit was Rs98 billion for full fiscal year.

So there is enough room for the State Bank to make another cut in the discount rate. “I think they can do it,” says noted economist Dr. S. Akbar Zaidi. “If inflation is a little more than 3 per cent there is a lot of room for easing of the monetary policy,” he says when asked by Dawn to comment on how realistic is the bankers anticipation of further slashing in discount rate. “They can do it...they can even print money,” Zaidi says implying that printing money amidst low inflation is not going to have as much adverse impact on the economy as it may have when inflation is high.

The SBP has been holding discount rate at 9 per cent since mid- February this year after making a big 5 per cent cut in phases since July last year.

The SBP — like any other central bank in the world — does not publicly hint at the timing and the quantum of reduction in its discount rate. So it is difficult to have an idea about whether the SBP will go for another rate cut — and if so how soon? But sources close to State Bank say the central bank is weighing the pros and cons of this possibility.

“There are two views about whether the discount rate should be cut now,” says one of the bankers close to SBP. “Some officials believe that since it is the credit retirement period and since monetary expansion has been much higher than targeted, the rate cut could be delayed.”

“But there are others who give due weightage to the fact that the banks always respond to the monetary policy changes with a time lag of two-three months. So the discount rate should be cut right now so that the benefit could be passed on to the private sector when the credit demand starts picking up in September onwards.”

Monetary expansion accelerated by more than Rs212 billion or 13.9 per cent up to June 15, 2002 against the full year target of Rs145 billion or 9.54 per cent. But since the bulk of monetary expansion (Rs181.3 billion) is caused by increase in net foreign assets one can assume that lowering of discount rate should not have a big inflationary impact.

Some bankers also say that many banks have started investing more of their surplus liquidity in treasury bills anticipating a cut in discount rate so that when the rate is lowered they are not too awash with liquidity to start lending at very low rates to the private sector.

But president of state-run National Bank Syed Ali Raza thinks higher holding of T-bills does not necessarily indicate that the banks are expecting further lowering of discount rate. “There is a good amount of excess liquidity with the banks. So it makes sense if they invest part of this amount into T-bills or long- term PIBs (to save the opportunity cost),” Raza told Dawn when reached over telephone. He declined to comment when asked if he too was anticipating another cut in the discount rate.

“That falls in the jurisdiction of the central bank,” was his terse reply.