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KARACHI, July 24: The State Bank on Wednesday left the six- month treasury bills rate unchanged, reinforcing earlier signals that a further easing in monetary policy is out of question — at least for the time being.
The SBP sold Rs10.7 billion six-month T-bills at a cut-off of 6.43 per cent keeping it intact at the previous level. “By keeping the cut-off unchanged we have reinforced our earlier signals that no immediate rate-cut is under review,” said a SBP official, who refused to be identified.
Earlier on July 10, the SBP had sold a record Rs69.2 billion T- bills against the target of only Rs20 billion to deflate high rumours of a rate-cut.
“It seems that the banks picked up that signal only partly,” said the SBP official. He went on to explain that in six-month T-bills the weighted average yield of the bids received showed some increase “which means that the banks do not now anticipate a rate-cut as strongly as they did earlier.” The weighted average yield rose to 6.40 per cent on Wednesday from 6.27 per cent on July 10.
But the weighted average yield of the bids received for three -month and one-year bills still showed some declining trend that means that the banks continue to expect cut in interest rates in these tenures. “That was why the SBP had to reject all the bids for three-month and one-year T-bills,” said the SBP official.
The central bank rejected Rs4.5 billion bids for three-month bills and Rs18.7 billion bids for one-year bills. In all SBP had received Rs34.2 billion bids on Wednesday auction of T-bills of which it accepted Rs10.7 billion bids for six-month bills that fell short of the pre-auction sale target of Rs15 billion.
RATIONALE: The central bankers say currently there is no need to make further rate-cuts as it is the period of credit retirement and traditionally credit demand picks up in end-September or early October. Expressed another way they think that the benefit of an immediate rate-cut will not be passed on by the banks to the private sector borrowers. Rather reduced rates may help the banks facing liquidity problem to borrow money at reduced rates.
But experience shows that any rate-cut made before the start of private sector credit offtake drive banks more precisely to lower their own lending rates. In contrast rate-cuts announced in the midst of high demand for private sector credit have only a nominal impact on the banks lending rates. That is why a five per cent cut in SBP discount rate in fiscal 2001-02 resulted in only a 1.57 per cent gross cut in the weighted average lending rate of all the banks combined. The net reduction in the lending rate was even smaller — only 87 basis points as the banks had cut the deposit rates as well to make room for lowering of lending rates.
That is why businessmen generally think that the SBP should soften its monetary policy further (that has been stable since February) if it wants to see the banks lending rate come down when private sector credit offtake starts picking up. Economists tend to agree with this demand but they would not throw their weight entirely on the business side.
Says former chief economist in Planning Commission Dr. Arshad Zaman: “It is a central purpose of monetary policy to keep interest rates at as low a level as feasible. To the extent that there are unlikely to be any negative effect of a reduction in interest rates the State Bank should moved towards a rate-cut if it was possible.” He would not say whether the SBP had a point in keeping the monetary policy stable at this moment but tends to agree that low inflation rate and stable exchange rate does provide room for further easing of the monetary policy.
The National Credit Consultative Committee that draws annual credit plan also observed in its last week meeting here that “though the overall lending rates have come down, there is still a room for further reduction in these rates.” Many a banker took this statement as an indication that SBP may make further cut in its discount rate — last reduced to 9 per cent in mid-February.
Businessmen also took it as a clue for the same. Two things did fuel their anticipation: (i) a statement made by the finance minister in his budget speech and reiterated the same day when NCCC met in Karachi that the government was aiming at a single digit interest rates; and (ii) the fact that the weighted average lending rate of all the banks stood as high as 12.17 per cent at end-May 2002.
