KARACHI, Aug 15 The State Bank of Pakistan on Saturday announced that it had implemented a new interest rate corridor system, which would be effective from next Monday, as part of the monetary policy.

The SBP issued a circular with defined mechanism of the interest rate corridor system hoping it would help to reduce volatility in short-term interest rates and bring more transparency in the implementation of monetary policy.

The SBP said interest rate corridor had been introduced for the money market overnight repo rates.

“The corridor will operate through standing overnight repo and reverse repo facilities i.e. floor and ceiling setting a formal corridor for the money market overnight repo rates consistent with the monetary policy,” said the circular.

The interest rate corridor will consist of two end-of-day standing facilities offered by the State Bank Existing SBP three-day repo facility would be renamed as SBP overnight reverse repo facility, which would become the 'ceiling' and a new SBP overnight repo facility to absorb excess funds from the market would serve as the 'floor' of the corridor.

The procedure for availing the end-of-day financing facility from the State Bank at the 'ceiling' rate in case the market is short of funds will continue to be in accordance with the existing practices and instructions issued by the State Bank from time-to-time in reference to the 'SBP three-day repo facility (now renamed as SBP overnight reverse repo facility) against Government of Pakistan Market Treasury Bills and Federal and Pakistan Investment Bonds.

The overnight end-of-day standing repo facility at the 'floor' rate will be available to scheduled banks and primary dealers which are left with excess funds in the inter-bank market.

These funds can be placed with State Bank in the form of an overnight repo against Treasury Bills at the 'Floor' rate.

Some of the operational details suggest that only scheduled banks and primary dealers will be eligible to place the funds at the 'floor' rate with SBP.

This facility would only be available at the end of the day, when it can be ascertained that the market has excess funds.

The time for intimating this amount to the State Bank will be between 230pm to 3.30pm from Monday to Friday and between 1200pm to 1.00pm on Saturday.

The minimum amount for the overnight repo/reverse repo facility will be Rs100 million, and in multiples of Rs50 million thereof.

The treasury bills acquired under the standing overnight repo facility from State Bank will be SLR (Statutory Liquidity Requirement) eligible.

The circular said the 'floor' and the 'ceiling' rates will be advised by the State Bank from time to time as deemed necessary.

State Bank will continue to conduct term Open Market Operations (OMOs) in the form of repos and reverse repos as per current practice in addition to these standing facilities.

Another circular in this connection said the existing SBP three-day repo facility against Government of Pakistan Market Treasury Bills and Federal or Pakistan Investment Bonds has been renamed as SBP overnight reverse repo facility.

This will serve as the 'ceiling' for the interest rate corridor while the tenor of this facility is now overnight.

The newly-introduced SBP overnight repo facility will be available at 10 per cent per annum. This will serve as the 'floor' for the interest rate corridor.

Hence, the floor and ceiling levels for the interest rate corridor are 10 per cent and 13 per cent per annum respectively (i.e. width of 300 bps).