Interbank rate dips below BB policy rate

Money is flowing more cheaply through the banking market than the rate Bangladesh Bank itself uses as its main policy signal, with overnight interbank funds falling to 8.73 per cent on Tuesday-77 basis points below the central bank’s 9.5 per cent policy rate.

The latest BB data show that the Dhaka Overnight Money Market Rate (DOMMR) stood at 8.73 per cent on September 15, with banks trading Tk6,162 crore in 78 overnight deals at the rate.
The Bangladesh Overnight Financing Rate (BOFR), another gauge of overnight funding costs, was slightly higher at 8.76 per cent�"still 74 basis points below the policy rate. The BOFR market recorded Tk3,852.24 crore in 25 overnight deals.

The difference becomes more interesting when the maturity of money is extended.

One-week DOMMR was 8.89 per cent, or 61 basis points below the 9.5 per cent policy rate. Banks traded Tk6,126.20 crore in 68 such deals.

One-month money was priced at 9.42 per cent, just eight basis points below the policy rate, with Tk260 crore traded in five deals.

But three-month money jumped to 11.07 per cent, which is 1.57 percentage points above the policy rate. Only Tk132.20 crore changed hands in five deals.

An overnight interbank rate is the price of very short-term bank-to-bank money. A business loan carries credit risk, capital cost, operating cost, provisioning requirements and maturity risk. So the corporate lending rate can remain much higher.

So the market is showing a striking maturity gap:
Overnight: 8.73 per cent
One week: 8.89 per cent
One month: 9.42 per cent
Three months: 11.07 per cent
In simple terms, banks can get money cheaply for a night or a week, but the price rises sharply when they have to commit funds for three months.

The separate call-money market also showed an average overnight rate of 8.72 per cent on Tuesday. Banks traded Tk1,406 crore in 28 overnight deals, with rates ranging between 8.50 per cent and 8.90 per cent.

This is happening despite Bangladesh Bank maintaining a relatively tight monetary stance. The policy rate is 9.5 per cent, while the Standing Lending Facility is 11 per cent and the Standing Deposit Facility is 7.5 per cent.

The figures suggest that immediate liquidity in the interbank market is comfortable. But the sharp rise in the three-month rate shows that banks are not pricing all maturities in the same way.

A senior treasury official of a private bank said the low overnight rate mainly reflects the availability of short-term funds among banks, but it should not be read as evidence that banks have become comfortable taking long-term credit risks.

"Banks may have surplus cash for a few days, but that does not mean they want to lock the money into longer-term lending. Credit risk and the quality of borrowers remain major concerns," he said.

Private-sector credit growth fell to 4.47 per cent in June, according to Bangladesh Bank's latest data. That is extremely low by Bangladesh's historical standard and shows that cheaper liquidity has not yet translated into strong demand for bank loans.