ALL eyes are set on July 30 review of the monetary policy. Most bankers believe that the State Bank of Pakistan would cut its key policy rate that has remained unchanged for the last four months.
“When the SBP had announced to keep the policy rate intact for the second time in its end-May review, we did anticipate a rate-cut in the next review of the policy by end-July,” said treasurer of a local bank.
He then elaborated: “What helped us form this view was that low economic growth amid an even lower industrial expansion would compel the authorities to facilitate businesses through reduced interest rates. That inflation was coming under control further strengthened our view,”Following the resignation of Governor Dr Shahid H. Kardar, the acting SBP governor, Yasin Anwar is expected to announce the change in the monetary policy. Informally, some SBP officials say that Mr Yasin is under the government pressure to cut the policy rate. “But we at the central bank would examine in detail if at all a rate-cut is warranted. Even on purely technical grounds, there may be a justification for lowering the rate,” he said, implying that if the central bank goes for a rate cut it would be based on market realities.
“In a high interest rate regime, the cost of domestic debt servicing increases, cost of production moves up, private sector credit in general and consumer credit in particular starts contracting. All this has happened in the last two years in the presence of a tight monetary policy,” said a former central banker. “Now, if the SBP does not relax the monetary policy, these problems would deepen further hurting the economic growth.”
Businessmen say banks are currently offering working capital to even first class borrowers at around 15.5-16 per cent by adding 1.5 to two percentage points over the cut-off yield on six-month treasury bills. Bankers say they lend money to non-prime borrowers at much higher rates ranging between 16-18 per cent whereas consumer loans are priced up to 20-22 per cent. Obviously boosting industrial production and facilitating expansion in domestic trade at this rate has become too difficult.
Others disagree. They say the central bank may also opt for keeping the policy rate intact for the third time and wait for inflation numbers of the first two months of this fiscal year before going for a rate cut. Treasurer of a foreign bank said, according to his bank’s forecast, consumer inflation would come down immediately after Ramazan and based on actual movements in the price line during September, the SBP may cut its policy rate in the next review due by the end of September.
“Our expectation is that this time the central bank would once again keep its policy rate unchanged,” he said.
Bankers say, a gradual increase in the yields on treasury bills during June-July came about as banks were anticipating that by end-July the central bank may opt for a rate cut and they were thus trying to make as much interest income as possible.
Bankers admit that one reason for expansion in bad loans was that in Pakistan interest rates remained high after the global recession of 2008-09 making it difficult for industries and businesses to service their loans when domestic economy slowed down as a result of the global recession.
“Businessmen are right in their assessment that lowering of interest rates would help in containing growth of non-performing loans,” said president of a large local commercial bank.
Some central bankers point out that excessive government borrowing from banking system had not only led to crowding out of the private sector but also resulted in monetary expansion of such a big proportion that loosening the monetary policy now carries a risk.
“What is more important to note is that government borrowings have not been used to finance development projects and thus spur the economy and create more jobs.
That provides a justification for keeping the monetary policy unchanged.”
Others, however, say that there is a need to relax the monetary policy and make other moves to create demand for private sector credit. “One way to compel banks to increase private sector loaning could be a change in interest rates corridor,” a senior central banker suggested implying that banks that come to place surplus funds with the SBP should now be offered a rate below more than three percentage points than the rate at which they can borrow overnight funds from the central bank.