Bank liquidity stress is fueling the overnight money rate

By on July 7, 2022 0

Continuing pressure in Bangladesh’s foreign exchange market and growing demand for cash ahead of Eid-ul-Azha pushed the overnight interbank money rate to at least a six-year high yesterday.

The weighted average rate in the overnight interbank money market, where banks borrow from each other on a day-to-day basis, stood at 5.26%, down from 5.01% a year ago. a month and 2.44% a year ago, according to central bank data showed.

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Yesterday’s rate is the highest since 2016, the last for which data is available.

A BB official, responsible for monitoring the money market, said the banking sector is now plagued by liquidity problems as many lenders buy US dollars from the central bank to pay import bills.

The central bank pumped a record $7.62 billion into the market in the fiscal year that ended June 30, meaning an equivalent amount in local currency moved into the market. the other way, intensifying the liquidity shortage.

Excess cash in banks stood at Tk 189,183 crore in May, down 11% year-on-year.

Bangladesh’s foreign exchange market has come under severe strain in recent months due to rising import payments, driven by soaring commodity prices in international markets.

Imports jumped to $75.40 billion between July and May, up 39% year-on-year.

Government borrowing from the banking sector has also increased significantly over the past fiscal year, amid weak revenue generation, putting further pressure on banks’ liquidity position, according to the head of treasury. a commercial bank.

The government borrowed Tk 64,755 crore from the banking system in the financial year 2021-22, up from Tk 26,078 crore in the previous year.

In order to further tighten the money supply to contain the surge in inflation, the central bank has adopted a tight monetary policy for the current fiscal year.

It raised its key rate twice in one month to deal with price instability.

The policy rate, which is followed by banks to set their interest rates on loans and deposits, was raised by 50 basis points to 5.50% on June 30.

Another banker says the overnight money rate is unlikely to fall anytime soon due to the spike in the key rate.

Customers also withdraw a significant amount of funds from banks on the occasion of Eid-ul-Azha to meet the expenses of purchasing sacrificial animals and other expenses.

“It has also tightened liquidity conditions,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Banks usually face liquidity pressure during Eid holidays in Bangladesh.

“The overnight money rate may stabilize after Eid,” said Emranul Huq, chief executive of Dhaka Bank.