RIZWAN BHATTI

KARACHI: In order to enhance the effectiveness of monetary policy and manage liquidity in the inter-bank market in an efficient and meaningful manner, State Bank of Pakistan (SBP) will introduce “SBP Target Rate” today (Saturday) along with a Monetary Policy Statement, sources said.

SBP Target Rate will be in addition to SBP Reverse Repo Rate (ceiling rate) and the SBP Repo Rate (floor rate) of the corridor. Presently, the ceiling rate stands at 8 percent and floor rate 5.50 percent with a width of 250 basis points.

Sources told Business Recorder that Monetary Policy Advisory Committee (MPAC) in its meeting held on Friday finalized recommendations for a revisit of interest rate corridor as announced by SBP earlier this year.

MPAC’s recommendations on interest rate corridor will be presented in the SBP’s board of directors’ meeting scheduled today for a monetary policy decision. Later on, the SBP board of directors will make a final decision about needed improvements in interest rate corridor in its meeting, they added.

Sources said that after deliberations, SBP board is likely to grant approval for MPAC recommendations and a “SBP Target Rate” will be introduced today (Saturday) along with a monetary policy statement.

SBP is most likely to set target rate between 6 and 7 percent and it will be specified within the corridor but will be lower than the ceiling rate and higher than floor rate, they added.

They said that by evolution target rate has already been set at 7.30 percent in the market, but it is not fixed. In addition, after the announcement, ultimately the target rate will become the policy rate and it will be closer to Kibor. While, policy rate will be a penal rate.

In February this year, SBP announced that it would review its interest rate corridor framework aimed to further strengthen the transmission of monetary policy. A main feature of this planned improvement is the introduction of ‘SBP Target Rate’ for the money market overnight repo rate. The target rate was planned to be announced in March this year, but it was delayed due to unknown reasons.

According to SBP, in accordance with the best international practices and to address issues relate to money market, SBP plans to align the operational target of overnight money market repo rate with the proposed policy rate. Overnight repo rate target would be a single policy rate to unambiguously signal SBP’s stance of monetary policy to achieve macro?economic objectives with price stability. The SBP Policy Rate will be set between the floor and ceiling of the interest rate corridor.

Specifically, using liquidity management tools, mainly OMOs and outright sale/purchase of government securities, SBP will aim at keeping the money market weighted average overnight rate close to the SBP’s target rate. The existing SBP’s reverse repo and repo rates will be above and below the proposed policy rate, as ceiling and floor of the interest rate corridor, respectively.

It may be mentioned here that SBP established an “Interest Rate Corridor” (IRC) in August 2009 with SBP reverse repo rate, the policy rate, as ceiling and SBP repo rate as floor. The main objective of introducing the corridor was to minimize volatility in the money market by ensuring the movement of short-term interest rates within a reasonable range. IRC promoted stability in the money markets aimed at strengthening the transmission mechanism of monetary policy to achieve the ultimate goal of maintaining price stability. The width of IRC was initially set at 300 basis points (bps) and was later reduced to 250 bps in February 2013.