KARACHI – The State Bank of Pakistan issued a detailed report about proposed changes in the next monetary policy which stated that the interest rate corridor framework was being reviewed by the bank to further strengthen the transmission of monetary policy for the desired effects.
The SBP has decided to restructure the interest rate corridor to minimise its volatility. The main feature of this planned improvement is the introduction of ‘SBP Target Rate’ for the money market overnight repo rate.
It said, “This rate will be in addition to SBP reverse repo rate (ceiling rate) and the SBP Repo Rate (floor rate) of the corridor.” Moreover, this rate will be specified within the corridor, lower than ceiling rate and higher than floor rate.
It had established an “Interest Rate Corridor” (IRC) in August 2009 with SBP reverse repo rate as ceiling and SBP repo rate as floor. The main objective of introducing the corridor was to minimise volatility in the money market by ensuring the movement of short term interest rates within a reasonable range. The width of the interest rate corridor was initially set at 300 basis points (bps) and was later reduced to 250 bps in February 2013. Before the introduction of the IRC, market interest rates, particularly short-term rates (overnight repo rates) witnessed a considerable volatility.
