KARACHI, Feb 4: Weighted average lending rate of all the banks combined went up to 6.69 per cent in December 2004, from 6.49 per cent in June 2004, showing an increase of 20 basis points in the first half of this fiscal year.

Provisional data released by the State Bank show that weighted average deposit rate of all the banks inched up to 1.30 per cent in December, from 1.21 per cent in June, reflecting an increase of nine basis points.

Thus, the banking spread or the gap between average lending and deposit rate widened to 539bps in December, from 528bps in June. This widening of the gap indicates that the banks are keeping more of the additional income through increase in lending rates with them and sharing less of it with their depositors.

This also indicates that the banks have not been able to cut operational cost to the levels where it would have become possible for them to give more to depositors in relation to the growth in income due to higher lending rates.

At 6.69 per cent in December 2004, the weighted average lending rate was only 68bps below inflation, as annualized inflation in that month was 7.37 per cent. But at 6.49 per cent in June 2004, the average lending rate was 284bps below annualized inflation that month.

If inflation falls further in the months ahead and if average lending rate continues to rise, real positive interest rates or interest rates above inflation will emerge.

But rising domestic oil prices and increase in prices of food items like sugar amidst phenomenal rise in the private sector credit off take supported by monetary overhung of previous years are all likely to keep inflation up in the months to come.

The State Bank has revised upward the initial target of inflation from five to seven per cent for this fiscal year, saying the economy would also grow by seven per cent instead of 6.6 per cent estimated earlier.

If the SBP projection proves right and inflation reaches seven per cent or slightly above this level, the stage seems set for real positive interest rates to emerge.

The reason is that weighted average lending rate of 6.69 per cent in December 2004 is bound to cross seven per cent during the third quarter of this fiscal year i.e. January-March 2005, given the fact that the central bank is tightening interest rates much faster than in the past.

The SBP has so far increased treasury bill yields to signal tightening of interest rates and has left its discount rate, once anchor of the monetary policy, unchanged at its November 2002 level of 7.5 per cent.

Senior bankers say that the central bank may have to increase the discount rate sometime during this quarter or the next quarter to reinforce its earlier signals of tightening of monetary policy.

Whereas real positive lending rates are almost sure to emerge during the second half of this fiscal year, people and businesses may have to wait endlessly to see real positive deposit rates or rates of return on bank deposits above inflation.

At 1.30 per cent in December 2004, the weighted average deposit rate was 607bps below annualized inflation of 7.37 per cent during that month. But at 1.21 per cent in June 2004, it was 812bps below annualized inflation of 9.33 per cent.

This shows that the gap between inflation and average deposit rate is narrowing down, but as the gap has shrunk mostly because of fall in inflation and least because of increase in deposit rate itself, chances are that real deposit rates may remain negative for a long time to come, particularly if inflation rises past the revised target of seven per cent during this fiscal year.