In a turn of events, Bangladeshs interbank call money rates have surged to a staggering 9.56 percent on Tuesday far above the admissible policy rate raising eyebrows and sparking concerns within the financial sector.
This surge comes despite the Central Banks policy rate resting at a modest 8 percent and the Standing Lending Facility (SLF) rate at 9.5 percent.
Compounding the mystery is the fact that banks, against lien, can borrow from the Central Bank at a maximum of 9.5 percent, with rates ranging between 8 and 9.5 percent.
But despite this, it is on rise and surpassed the policy rates. In this regard experts point to several factors contributing to this anomaly. One primary reason could be the heightened risk perception prevailing in the interbank market, prompting lenders to demand higher returns to offset potential losses.
This risk aversion could stem from concerns over the creditworthiness of borrowing institutions or uncertainties surrounding economic stability. Moreover, the mismatch between the Central Banks policy rate and the prevailing market rates suggests a deeper underlying issue of liquidity management within the banking system.
Despite the availability of funds through the SLF at rates comparable to or lower than the prevailing call money rates, banks may be hesitant to tap into these facilities due to stringent eligibility criteria or bureaucratic hurdles. Relating to this, a senior banker in a private commercial bank said many do not comply with liens.
He said a banks lien to a central bank refers to the collateral or assets that a bank pledges to the central bank in exchange for loans or liquidity support. This collateral acts as security for the funds provided by the central bank and helps ensure stability in the financial system.
When contacted Habibur Rahman, chief economist of Bangladesh Bank said the consequences of this surge in call money rates are manifold. Businesses and individuals reliant on short-term financing face increased borrowing costs, potentially hampering investment and consumption activities.
Furthermore, the volatility in interbank rates could spill over into other financial markets, destabilizing investor confidence and exacerbating market uncertainty.
He said, "I think many may not know about policy rates that the central bank lends money at 9.5 per cent. I don think why many are borrowing at higher prices interbank despite availability of low costs in BB."
In response to these developments, stakeholders are calling for a thorough review of liquidity management strategies and a reassessment of monetary policy tools to ensure alignment between policy rates and market dynamics.
The Central Banks intervention may be crucial in restoring stability to the interbank market and mitigating the adverse effects of surging call money rates on the broader economy.
