The SBP announced its time-bound plan in February to improve its Interest Rate Corridor (IRC) by introducing the ‘target rate’ between the floor and ceiling rates of the corridor to make liquidity management in the interbank market more effective.
Earlier, the SBP reverse repo rate served as both the policy rate as well as the ceiling rate. But overnight rates close to the policy rate made the ceiling rate less penal and increased the probability of banks availing the SBP discount window more frequently.
Under the new IRC, the ‘target rate’ is fixed between the floor and ceiling of the interest rate corridor. The target/policy rate has now been reduced from 6.5% to 6% while the ceiling rate (also called the discount rate) currently stands at 6.5%.
Using liquidity management tools, mainly open market operations and outright sale/purchase of government securities, the SBP now aims to keep the money market weighted average overnight rate close to the SBP target rate.
Published in The Express Tribune, September 13th, 2015.
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