KIBOR shows modest decline despite central bank's interest rate cut

Pakistan six months lending rate commonly known as Karachi Interbank Offered Rate (KIBOR) showed meagre drop despite the central bank cutting the interest rate by 250 bps on Monday.

The six-month KIBOR only declined by 4 basis points to 13.29%, the day after the monetary policy announcement.

Since June 28, the six-month KIBOR has fallen by 685 basis points, while the SBP has reduced policy interest rates by 700 basis points since June this year.

On Tuesday, the three-month KIBOR stood at 13.71%, down 16 basis points from Monday and 653 basis points since June 28. The one-year KIBOR rate fell by 8 basis points to 13.09% a day after the interest rate cut, down 613 basis points since June 28.

Ahsan Mehanti, an analyst at Arif Habib Corp, explained that KIBOR did not decline proportionately with the interest rates because KIBOR was already below the interest rates.

Additionally, banks were cautious due to the reversal in inflation, which rose to 7.2% in October from 6.9% in the previous month.

In June this year, Pakistan recorded its highest interest rate at 22%, with KIBOR at 25%. According to the SBP, private sector credit grew by 4.0% in FY24 compared to 2.3% in FY23.

After a slow first quarter, credit demand picked up from the second quarter onwards, driven by moderate economic activity expansion and persistent cost pressures in some industries.

Despite this growth, tight monetary policy and significant financial needs from domestic sources continued to suppress credit demand in FY24.

Furthermore, commercial banks preferred risk-free investments in government securities, attracted by the substantial increase in government borrowing requirements amid higher interest rates.