KARACHI, July 28: The State Bank of Pakistan has warned banks to bring down the Karachi Inter-Bank Offered Rate (Kibor) up to 13 to 13.5 per cent or face action against this undesirable inter-bank rate.

The warning came in a meeting with the CEOs of commercial banks, who were hurriedly called to hear SBP Governor Dr. Shamshad Akhtar on the issue, said banking sources on Monday.

Participants of the meeting included the chief executive officers of a large number of banks, heads of bank treasuries and high-level functionaries of the SBP.

The banking sources said the CEOs and other high officials were called after a meeting between Finance Minister Naveed Qamar and the governor SBP.

They said that the State Bank voiced its concern over the increase in the 6-month Karachi Interbank Offered Rate (Kibor) benchmark, which came into effect shortly after the SBP increased the discount rate and statutory reserves on May 23.

Six-month Kibor was quoted at 14.24 per cent on Monday and it was the SBP’s desire that this number be brought down to between 13 per cent and 13.5 per cent on Tuesday, July 29, to coincide with the SBP’s announcement of monetary policy.

Bankers said this desperate move on the part of the SBP seems designed to quiet the voices in the manufacturing industry as well as the stock market that have seen interest rates gone up resulting in their profit margins decline.

Senior bankers were of the view that any such move on the part of the SBP was tantamount to market manipulation since it translated into a de-facto cap on lending rates.

Kibor rates are quoted on a daily basis by a large number of banks to indicate the cost of borrowing and lending money for tenors ranging between one week and 3 years.

The most important of these being the 6-month tenor rate, which has been used since 2003 as a benchmark to price loans, TFCs, deposits, interest rate swaps, cross currency swaps and a whole host of financial products.

According to treasury professionals the current tight monetary policy and expectations of its further tightening have resulted in the Kibor remaining above the SBP’s own discount rate of 12 per cent.

They say that the Kibor is a daily pricing mechanism and is different from the discount rate, which is only adjusted after long periods of time.

Kibor, by virtue of its daily pricing, is able to factor in inflationary expectations of the market and is, therefore, a rate which predicts the actions of the monetary policy.

“At current levels the Kibor is factoring in at least 2 per cent to 2.5 per cent of further increases in the SBP discount rate over the course of the coming 6 months,” said a senior banker.

Sources also said that when the SBP officials were told that Kibor reflected market realities and those 6-month inter-bank borrowing rates are between 14 per cent and 15 per cent, they said that the inter-bank market could trade funds at whatever level it wished so long as Kibor was in the range specified at 13 per cent to 13.5 per cent.