Benchmark Treasury bill rates and key indicative rates fell after weeks of stagnation in response to a reduction of policy interest rates by the Monetary Board of the Central Bank.
Interest on the 91-day Treasury bill fell to 7.98 percent at last week’s primary market auction from 8.07 percent a week ago. A year ago the rate was 11.28 percent.
The six month Treasury bill yield fell to 8.75 percent from 8.96 percent. A year ago the rate was 11.96 percent. The one year Treasury bill rate fell to 9.17 percent last week from 9.29 percent. The one year bill yield a year ago stood at 12.35 percent.
Earlier this month the Monetary Board of the Central Bank slashed policy interest rates by 25 basis points in a bid to stimulate private sector credit growth. Dealers said this move would also help the government meet its budget deficit target of 8 percent of GDP this year after high interest rates contributed towards a widening of the deficit to 9.9 percent in 2009, from a targeted 7 percent.
The Monetary Board has reduced the repurchase and reverse repurchase rates by 0.25 percent each to 7.25 percent and 9.5 percent respectively. The repurchase rate is the rate at which commercial banks deposit excess funds with the Central Bank, while the reverse repurchase rates apply to overnight borrowings of the banking system from the Central Bank. These rates stood at 8.50 percent and 11 percent respectively a year ago.
Maturing Treasury bills amounting to Rs. 12 billion were auctioned last week for which bids amounting to Rs. 33.9 billion were received. The Central Bank accepted bids amounting to Rs. 13.1 billion, thereby absorbing an additional Rs. one billion for the government.
Moving south...
The weighted average prime lending rate of commercial banks fell to 10.25 percent from 10.31 percent a week ago. This indicative rate, which applies to lending rates applicable to high net worth individuals and companies, stood at 15.20 percent a year ago.
Dealers said the Central Bank could lower policy rates further in order to bring the prime lending rate to single digit levels.
"The Central Bank could reduce rates by another 25 basis points, or this may be the lowest we would see," a dealer told The Island Financial Review.
"The Central Bank’s intension is clear. It wants domestic credit to the private sector to increase but banks are still reluctant to lend above current levels as quality lending is their main concern. Also, a bank would have to set aside more capital the more it lends," he said.
Earlier this month, Ministry of Finance and Planning Director General for Fiscal Policy S. R. Attygalle told a public seminar that the government was planning to slash taxes imposed on banks, which already pays 65 percent of profits as taxes to the state.
Data available up to May showed that private sector credit was growing but, loans from the domestic banking sector to the government were growing at a much faster rate.
Private sector credit grew by 3.5 percent last May to Rs. 1,249.9 billion from Rs. 1,207.1 billion a year ago while bank loans to the government increased by 32.6 percent to Rs. 463.3 billion from Rs. 349.5 billion. Credit to the government from foreign sources declined 9.3 percent to Rs. 103.3 billion from Rs. 113.9 billion.
Meanwhile, net credit to public corporations grew 92.9 percent in May to Rs.102.8 billion from Rs. 53.3 billion a year ago. Credit from domestic banking sources increased by 96.9 percent to Rs. 74.2 billion from Rs. 37.7 billion a year ago.
Open market operation
rates move north...
Dealers said open market operations saw yields increase to 8.09 percent last Friday from 8.04 percent at the beginning of the week, despite a policy rate cut which saw other key market rates move down.
Commercial banks are holding to excessive liquidity positions as a result of maintaining an exchange rate pegged to the US dollar. The Central Bank absorbed Rs. 34.7 billion on average each day last week and dealers said the market was holding on to an excess position of between Rs. 25 billion to Rs. 30 billion as at Friday.
"When interest rates are lowered and banks increase their lending, inflation pressure comes in. The Central Bank absorbs excess market liquidity so that inflation would not be allowed to raise its head," a dealer said.
But dealers are not worried about inflation right now, as banks are still reluctant to lend.
"Two to three years from now we could have a problem with inflation when economic growth really starts to kick-in," a dealer said.
source - www.island.lk
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