KARACHI, Jan 23: Whereas expectations are rife in the banking circle about another cut in the discount rate State Bank Governor Dr Ishrat Husain hinted here on Thursday that no such move was on the cards.
“This is all speculation,” he said when asked by Dawn whether an increasing spread between SBP discount rate and treasury bills yield had necessitated further lowering of the discount rate.
The governor, who was presiding over the signing ceremony of an agreement between National Bank and Western Union, said the determinants of the discount rate and T-bills rate are different. So widening of the gap between the two does not call for further lowering of the discount rate (to minimize the gap).
When asked what was the desirable level of the difference between discount rate and T-bills rate, the governor said the SBP would reflect on this and other issues in its monetary policy document. Later on he told Dawn that the document would be issued within 10-15 days.
The banking system has seen a very sharp fall of the treasury bills yield after a one-and-a-half per cent cut in the discount rate in November last.
The weighted average yield on benchmark six-month T-bills has declined by two and a half per cent to 3.84 per cent and further reduction is likely due to a high level of liquidity in the inter -bank market. Thus the spread between six-month T-bills rate and the discount rate that stood at 2.65 per cent prior to slashing of the discount rate on November 16 has now increased to 3.66 per cent.
Senior bankers say six-month T-bills rate may further go down in the next auction of the bills due in February. They hinge their expectations on the fact that the banking system has been excessively liquid and the SBP seems inclined to mop up only part of this liquidity. On the other hand the government is also not making net fresh borrowing. Nor there seems to be any big demand coming from the private sector. “So the stage seems set for more cut in the discount rate,” says head of treasury of a big foreign bank.
“We are looking for further lowering of SBP discount rate as the banks have generally bench-marked it for their lending rates,” said head of credit division of a large local bank. “We lend to our prime borrowers at one or two per cent plus the discount rate so for them our rates seem a bit higher at a time when the T-bills rate are below four per cent.” What stops the banks then to cut down their lending rates accordingly? “You see pricing our loans at a rate lower than the discount rate is not considered very prudent,” says a foreign banker. “But at times we do lend at such rates to very selected clients.”
Senior bankers say the SBP will have to do something to bring in some equilibrium in the liquidity level of the banking system lest the banks take a hit on their profitability.
“The risk (of the banks getting a hit) is very genuine. Either the government should increase spending or else the SBP should open sort of a daily window for managing liquidity,” says treasurer of a major foreign bank.
“Through this daily window the SBP may inject fresh liquidity into the system or mop it up as the case may be through some instrument,” explains another foreign banker.
If such a window opens the banks will have access to overnight funds at market-based rates at times of shortages rather than depending on the discount window from where they get overnight funds at a fixed rate — currently much higher than in the inter-bank market.