Lending rates could rise as TBs yield jumps
Feb 14, 2011
BANK lending rates may rise following increases in treasury bond yields since the beginning of the year, the Central Bank has said.
By Ibrahim Kasita
BANK lending rates may rise following increases in treasury bond yields since the beginning of the year, the Central Bank has said.
Although commercial banks peg their lending rates on Treasury Bill (TB) rates, a high bond rate will provide an alternative risk-free avenue for bank deposits. The 91-day TBs are at 9.6%.
The two-year Treasury bond rates rose to 13.4% in February, up from 8.8% as at January 25. The 10-year treasury bond rates leaped to 13.2%, from 10.8%
Commercial banks normally set loan interest rates depending on the rate at which the Government is paying on treasury securities. They (TBs) are used as a benchmark because they are a risk-free lending opportunity to banks.
The other factors considered in lending rates computations are inflation rates and risk premiums. The weighted rate was 19.7% in December, which was a drop from 20.4% in November.
“Lending rates could rise since the monetary policy stance is tightening,†Elliot Mwebya, the Bank of Uganda communication director, stated.
“The recent rise in interest rates on the Treasury Bills and bonds reflect low liquidity in the market,†adding that the bank “will continue to moderate the increase at every auction, either by limiting the amounts offering in every auction or participating in the secondary market.
The bond is currently traded at the Uganda Securities Exchange.
The prediction follows the Bank of Uganda’s auctioning of sh100b Treasury bonds on February 2. However, it accepted only sh12b to avoid a big jump in yields, which would have distorted the market.
“This is because the money market is tight mainly due to delays in government releases and the fact that foreign exchange interventions also withdraw liquidity from the system,†Mwebya said.
The Central Bank has continued to participate in the foreign exchange market to slow the slid of the shilling, which, if unchecked, would lead to inflationary pressures.
Yesterday, traders quoted the local currency at sh2,35/2,375 to the greenback. Sustained dollar gains force the Bank of Uganda to intervene on the selling side. “Intervention will remain if the exchange rate remains volatile.Tight monetary policies and interventions in the foreign exchange market remain the viable tools under a liberalised economy like Uganda,†Mwebya noted.
“The Central Bank’s exchange rate policy will remain focused on managing volatility with no fixed rate target, while allowing the underlying demand and supply conditions to determine the exchange rate movements.â€
Mwebya predicted that the developments in the global currency markets would continue to spill-over in the domestic economy.
He said intensified official intervention in most high-income countries, improving global economic recovery, commodity market strength, trade dynamics, uneven interest rate normalisation, global currency diversification and the persistent quest for high yields were likely to eventually drive capital flows back into the local economy.
“This and with investments in the oil sector are likely to strengthen the shilling in the short-term,†Mwebya said.
For investors, the high yields on Treasury bonds are an opportunity to invest. But the high interest rates on loans could limit borrowing for investments and increase the cost of doing business
“High yields are good for them. This could, for example attract even foreign investors since yields in foreign markets are still quite low,†Mwebya said.
“Credit extension has continued and the fact that the auction was oversubscribed indicate that the (financial) system is quite strong.â€
BANK lending rates may rise following increases in treasury bond yields since the beginning of the year, the Central Bank has said.
Although commercial banks peg their lending rates on Treasury Bill (TB) rates, a high bond rate will provide an alternative risk-free avenue for bank deposits. The 91-day TBs are at 9.6%.
The two-year Treasury bond rates rose to 13.4% in February, up from 8.8% as at January 25. The 10-year treasury bond rates leaped to 13.2%, from 10.8%
Commercial banks normally set loan interest rates depending on the rate at which the Government is paying on treasury securities. They (TBs) are used as a benchmark because they are a risk-free lending opportunity to banks.
The other factors considered in lending rates computations are inflation rates and risk premiums. The weighted rate was 19.7% in December, which was a drop from 20.4% in November.
“Lending rates could rise since the monetary policy stance is tightening,†Elliot Mwebya, the Bank of Uganda communication director, stated.
“The recent rise in interest rates on the Treasury Bills and bonds reflect low liquidity in the market,†adding that the bank “will continue to moderate the increase at every auction, either by limiting the amounts offering in every auction or participating in the secondary market.
The bond is currently traded at the Uganda Securities Exchange.
The prediction follows the Bank of Uganda’s auctioning of sh100b Treasury bonds on February 2. However, it accepted only sh12b to avoid a big jump in yields, which would have distorted the market.
“This is because the money market is tight mainly due to delays in government releases and the fact that foreign exchange interventions also withdraw liquidity from the system,†Mwebya said.
The Central Bank has continued to participate in the foreign exchange market to slow the slid of the shilling, which, if unchecked, would lead to inflationary pressures.
Yesterday, traders quoted the local currency at sh2,35/2,375 to the greenback. Sustained dollar gains force the Bank of Uganda to intervene on the selling side. “Intervention will remain if the exchange rate remains volatile.Tight monetary policies and interventions in the foreign exchange market remain the viable tools under a liberalised economy like Uganda,†Mwebya noted.
“The Central Bank’s exchange rate policy will remain focused on managing volatility with no fixed rate target, while allowing the underlying demand and supply conditions to determine the exchange rate movements.â€
Mwebya predicted that the developments in the global currency markets would continue to spill-over in the domestic economy.
He said intensified official intervention in most high-income countries, improving global economic recovery, commodity market strength, trade dynamics, uneven interest rate normalisation, global currency diversification and the persistent quest for high yields were likely to eventually drive capital flows back into the local economy.
“This and with investments in the oil sector are likely to strengthen the shilling in the short-term,†Mwebya said.
For investors, the high yields on Treasury bonds are an opportunity to invest. But the high interest rates on loans could limit borrowing for investments and increase the cost of doing business
“High yields are good for them. This could, for example attract even foreign investors since yields in foreign markets are still quite low,†Mwebya said.
“Credit extension has continued and the fact that the auction was oversubscribed indicate that the (financial) system is quite strong.â€