CB seen tightening by removing lower repo penalty rate
Tuesday, 27 January 2015 00:42
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Reuters: The Central Bank is expected to hold key interest rates steady at record lows on Tuesday for a 12th straight month, but tighten policy by scrapping the lower repo rate paid to banks that use the standing deposit facility more than three times a month, a Reuters poll showed.
The repurchase, or standing deposit facility rate, is at 6.50% and reverse repurchase rate or standing lending facility is at 8.00%, while commercial banks’ statutory reserve ratio (SRR) is at 6.00%.
Eleven out of 12 analysts expected the central bank to leave rates unchanged while one analyst predicted the monetary authority would raise both repo and reverse repo rates by 25 basis points.
Ten out of 12 analysts polled, however, expect the Central Bank to remove the lower repo rate of 5.0% paid to commercial if they use the standing deposit facility more than three times in one month.
The Central Bank, in a move tantamount to an interest rate cut, said in September said that it would pay only 5% interest rate, instead of 6.5%, to commercial banks using its standing deposit facility for a fourth time or more in a calendar month.
The limit was imposed to discourage commercial banks from parking its deposits in the central bank. Instead, the central bank asked banks to lend more to customers at lower rates.
“Removing the limit is an indirect signal of rise in market interest rates,” an analyst told Reuters on condition of anonymity. “When the central bank introduced it the market rates fell more than 1% without a rate cut. If they remove it, market rates will rise by more than 1%.”
The Central Bank, under the new stewardship of Governor Arjuna Mahendran, will announce its decision at 7:30 a.m. on Tuesday after its Monetary Board meeting later on Monday.
The Government will announce its interim budget on Thursday.
Between December 2012 and January 2014, the Central Bank cut the repurchase rate, or repo rate, by 125 basis points (bps) and the reverse repurchase rate, the reverse repo, by 175 bps to stimulate economic growth.
The pace of economic growth is estimated to have picked up to 7.8% last year from 7.3% in 2013. The central bank has forecast growth at 8% this year.
