Banks should cut interest rate spreads
The average interest rate spread — or the gap between average lending and deposit rates — shot up to 586 basis points in October from 334bps a year ago.
Fresh average lending and deposit rates of banks rose to 13.67 per cent and 7.81pc in October, respectively, from 8.81pc and 5.47pc last year.
The decision by the State Bank of Pakistan (SBP) to leave the key rate unchanged at 13.25pc in November was not without wisdom: recently released Pakistan Bureau of Statistics (PBS) data shows that annualised CPI inflation jumped to 12.7pc in November from 11.4pc in October.
This jump in the national average is too high. It indicates that underlying inflationary pressures are too strong. Containing those inflationary pressures within a month amid a weaker-than-anticipated fiscal performance and growing political uncertainty may prove too difficult.
In all probability, the inflation number for December will also remain high even if it does show a modest decline. While reviewing its monetary policy in the second half of January 2020, the central bank will rely on the CPI inflation number of December. It will also rely on inflationary pressures prevailing at that time. One of the most reliable indicators of such inflationary pressures will be the inflation for the poor, measured every week with the Sensitive Price Index (SPI).
The credit risk of banks is on the rise because the private sector is finding it difficult to repay past loans
Should we expect that the annualised reading of SPI inflation in the first or second week of January will show a steep declining trend — steep enough for the SBP to believe that it will have a desired impact on CPI inflation? Prudence demands we should not. Annualised SPI inflation is galloping: it went up from 14.7pc in September to 15.1pc in October — and surged to 20.2pc in November.
For the central bank, the genesis of maintaining a tight monetary policy in January is in the making. Banks are, therefore, well-assured that the banking spread might remain as high as it was in October, allowing them to continue earning high interest incomes.
According to a recent report by Topline Securities, cumulative profits of publicly listed banks rose 48pc year-on-year to Rs45.5 billion in July-September. Of that, 33pc originated from net interest income and 17pc from non-interest income.