In line with the industry trend, State Bank of India (SBI), on Monday, raised its benchmark lending rate by 50 basis points and deposit rates by up to 150 basis points.

While the increase in benchmark prime lending rate to 12.25 per cent will make existing home, auto and corporate loans from the country’s biggest lender dearer, the hike in deposit rates will ensure better returns for deposit-holders.

The decision comes days after Finance Minister Pranab Mukherjee expressed hope that lenders will not raise their interest rates in response to the RBI’s monetary tightening measures last month.

“The bank has revised the benchmark prime lending rate upwards by 50 basis points from 11.75 per cent to 12.25 per cent effective from August 17″ SBI said a filing to Bombay Stock Exchange.

However, for new borrowers, the base rate, which became effective from July 1 this year, stands at 7.5 per cent. The base rate is the minimum lending rate below which loans cannot be offered.

As far as revision in fixed deposit rates is concerned, SBI increased the interest rate by 150 basis points (1.5 per cent) to 4 per cent for term deposits of 15-45 days tenor. The deposit rate increase is the maximum in this slab.

For fixed deposits with a tenor between 181 days and less than one year, the new interest rate will be 6 per cent against the existing 5.25 per cent, while 555-day fixed deposits will attract an interest rate of 7.25 per cent, an increase of 125 basis points. The interest rate on term deposits of between 3 to 5 years tenor will go up by 75 basis points to 7.25 per cent from tomorrow, while interest on the 5-8 years maturity slab has been increased by 25 bps to 7.50 per cent.

Floating fixed deposit

Meanwhile, the bank also announced the launch of a floating fixed deposit product linked to base rates with effect from September 6, 2010. The bank announced launching of floating rate term deposit products linked to the “Base Rate” effective from September 6, 2010″ the bank said in a filing.

This innovative deposit product will not carry a fixed rate, unlike the existing fixed deposit product. The interest rate would change in tandem with the base rate, as and when a revision in the benchmark rate takes place.

For a one-year floating fixed deposit, the interest rate will be 50 basis points lower than the existing base rate, which is currently 7.5 per cent, it said. In the case of a three-year floating term deposit, the interest rate will be 25 basis points lower than the base rate, while for a five-year floating term deposit, the interest rate will be at par with the base rate.

The new deposit product will be introduced from September 16, it said.?? The RBI, in its monetary review last month, raised the short-term borrowing (reverse repo) rate by 50 basis points and lending (repo) rate by 25 basis points to tame inflation.

Following the monetary action, most of the public sector lenders, including Punjab National Bank, Bank of Baroda, Bank of India, Oriental Bank of Commerce and Canara Bank, responded by hiking their BPLRs by up to 50 basis points. At the same time, many banks increased deposit rates as well.

The bank has also increased its fixed deposit rates by a similar percentage point in various retail buckets up to one year

The ECB cut the cost of borrowing in the 15-nation eurozone by a record 0.75 percentage points.

European central banks took unprecedented action Thursday to ward off a looming recession, slashing their benchmark lending rates to boost business investment and household spending.

The ECB cut the cost of borrowing in the 15-nation eurozone by a record 0.75 percentage points to 2.50 percent as the eurozone faced its first recession while the Bank of England returned Britain to World War II levels with a full point reduction to 2.0 percent.

For the ECB, it was also an unprecedented third rate cut in two months, following a coordinated cut with other central banks on October 8 and another reduction in early November.

“The ECB’s 75 basis point interest rate cut comes as a pleasant surprise after recent hints from governing council members that a 50 basis point cut was more likely,” said Jennifer McKeown at consultants Capital Economics.

In Stockholm, the Swedish central bank set the tone early in the day by nearly halving its key rate by 1.75 percentage points to 2.0 percent to “dampen the fall in production and employment” due to the global financial crisis.

Repeated and sharp central bank cuts have failed so far to unfreeze the interbank lending crucial to business that ground to a halt after the US market for high-risk or subprime mortgages collapsed in mid-2007.

ECB officials had suggested last week they did not want to use up all their rate cutting options too quickly in case the recession drags on and markets had accordingly anticipated a half point cut.

In the event, the ECB clearly recognised “that we are not in ordinary times and that they cannot afford to keep the same range of policy moves,” Bank of America economist Gilles Moec said.

The decision signals that “the best course of action is to go fast and deep, probably on the condition that the relaxation will be quickly taken back as soon as the first signs of recovery appear,” Moec added.

“The ECB’s reluctance to cut by more than 75 basis points seems to stem from a desire to keep some ammunition back and also concern that too big a cut could hurt confidence,” said economist Howard Archer at consultants IHS Global Insight.

The ECB still has ample room for manoeuvre with inflation falling from a record 4.0 percent in July to 2.1 percent last month. It is forecast to drop further as oil and food prices decrease.

The bank’s medium term inflation target is just below 2.0 percent.

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Public sector lender Bank of Baroda today hiked its benchmark prime lending rate (PLR) by 50 basis points to 12.50 per cent.

The hike takes the bank’s PLR from the existing 12 per cent to 12.50 per cent, the bank informed the Bombay Stock Exchange (BSE).

The hike is with effect from today, the bank said.

Earlier in the week, another lender, IDBI Bank, had hiked its PLR by 0.50 per cent to 13.25 per cent.

A clutch of banks have also upped their deposit rates in recent days while the country’s largest lender State Bank of India’s Chairman O P Bhatt has said that there is an upward bias in deposit rates.

Kotak Mahindra Bank, ICICI Bank, Union Bank of India and Punjab National Bank are amongst the banks that have raised their deposit rates.

The increase in PLR and deposit rates was widely expected after the Reserve Bank of India increased its key short-term rates–repo and reverse repo–on July 27 with a view to combat the prevailing high inflation.

The repo rate was hiked by 0.25 per cent to 5.75 per cent while the reverse repo rate has been upped by 0.50 per cent to 4.5 per cent, sparking-off the present round of hikes by banks.

HDFC Bank, Lakshmi Vilas Bank and Central Bank set off a round of deposit rate hikes to attract funds to meet accelerating investment and consumption, but lending rates may stay where they are, at least for now, as banks’ high profitability provides a cushion.

Rates are being raised between 25 basis points and 75 basis points across maturities. A basis point is 0.01 percentage point.

The increases come a day after the Reserve Bank of India raised key policy rates and sent signals that it is on course to keep it going until it manages to temper the demand pull price increase, which forced it to raise inflation forecast for the year to 6% from 5.5%.

“Considering that liquidity in the system has moved into a negative terrain and that there is a strong potential for loan growth, we think it is the appropriate time to raise deposit rates,” said Paresh Sukthankar, executive director at HDFC Bank. “The transmission to base rate will take a few weeks.”

Base rate is the minimum at which a bank can lend. The second-largest private bank said it will pay 25 basis points more for two-year deposits at 7.5%, and 7% for one year. These are effective July 30. The sharpest increase of 75 basis points, to 5.25%, is for six months, where temporary factors may keep the market tight.

Lenders are raising deposit rates as loan growth is higher than deposit rates, absorbing the excess funds that banks had. To keep the business going smooth, they need to constantly attract funds, which are finding their way into higher-yielding investments such as real estate and stocks. But lending rates are not rising since banks benefited from cheap funds after the credit crisis, instead of passing it on to customers.

Borrowing costs for home owners and aspiring car buyers may not rise as fast since banks can refrain from doing for fear of reduced demand. Their profitability would not be crimped substantially, since they did not pass on all the cheap funds they got from RBI after Lehman Brothers collapsed.

The central bank cut the repo rate, the rate at which it lends to banks, by 425 basis points, to 4.75% from 9%, between October 2008 and February this year. The banks’ response was not proportionate, especially in lending.

During the period, banks cut 1-3 year deposit rates by 400 basis points to a low of 6%. But the benchmark lending rates hardly moved by 100 basis points between 14.25% and 13.25%. This action by banks boosted their profitability, leaving the customer poorer.

Net interest margins of banks got a boost. Axis Bank’s is at 3.7%, Punjab National Bank’s 3.9% and HDFC Bank’s 4.2%.
These high margins leave scope for slower gains in lending rates even if the central bank keeps raising rates. “The base rate will go up only when the average cost of deposits goes up and thus there will be some lag effect for revising lending rates,” said JM Garg, chairman and managing director at Corporation Bank.
This is not the first time that banks have raised deposit rates, leaving lending rates untouched. They increased deposit rates by 75-100 basis points between March and July this year while benchmark lending rates remained static for a year now.

But the scene of excess liquidity may be changing fast, although no squeeze is foreseen. Although the situation of banks parking funds with the central bank has changed to them borrowing from RBI, it may not accelerate. On Tuesday, the surplus liquidity was Rs 2,225 crore, the difference between the money parked by banks with RBI.

Governor D Subbarao on Tuesday said it was the intent of the central bank to keep liquidity in a deficit mode, which will ensure that the repo rate would be the effective rate, triggering fears of a rise in the cash reserve requirement.

Non-food credit accelerated to 22.3% as on July 2, from 17.1% in March, above the target of 20% for the year, partly due to high borrowings by telecom companies to pay for spectrum.

Bank of Thailand revised up its growth forecast for this year in view of the robust expansion of the economy during the first half of this year.

The central bank expects the economy to grow between 6.5% and 7.5% this year, a sharp revision to April’s forecast of between 4.3% and 5.8%. The economy is expected to retain the growth momentum during next year on the back of sound domestic economic fundamentals, bright prospects of a continued global recovery and improvements in consumer and investor sentiments.

Releasing the central bank’s latest inflation report, deputy governor Paiboon Kittisrikangwan said growth is seen in the range of 3%-5% for next year, unchanged from the projection in April. Going forward, the Thai economy would be driven by private domestic demand and the export sector, the official said.

However, the bank expects the growth momentum to moderate in the second half of this year compared to the first half due to persisting internal political tensions and softened global growth due to sovereign debt concerns. In the first quarter, the Thai economy grew 12% annually, its fastest pace in 15 years, led by strong exports.

Thailand’s economy is likely to grow more than initially expected, the International Monetary Fund said last week. The Washington-based lender said it foresees Thailand’s real gross domestic product rising 7%-8% in 2010, up from its previous projection of 7%. Thereafter, the Thai growth may come down to 4% next year, the IMF said. That was a downward revision from 4.5% growth projected in July.

The central bank revised down its inflation forecasts, citing subsiding oil and commodity prices, readiness of businesses to maintain prices at the prevailing levels until the end of the third quarter and the government’s extension of some cost-of-living reduction measures to the end of the year. The bank now sees inflation within the range of 2.5%-3.8% this year, down from the previous forecast of 3.3%-4.8%.

Meanwhile, the bank slightly revised up the inflation forecast for next year, citing increasing demand pressures and narrowing output gap. In 2011, inflation would be between 2.5%-4.5%, it said, compared to 2.3%-4.3% previously forecast.

The bank’s monetary policy committee assessed that uncertainties surrounding the growth projection were lower than that in the previous April report, with downside and upside risks becoming more balanced, the report said. This was mainly due to diminished domestic downside risks, as political tensions have abated to some degree. On the other hand, the global growth prospect will remain a major risk factor on the external front, the bank noted.

Here we go again another government attempt to stop foreclosure. With government initiated loan modification programs failing to put a stop to the foreclosure crisis.

Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System, told congressional leaders in a letter yesterday that the Fed will seek to renegotiate mortgages it owns that might otherwise enter foreclosure.

It is unclear how many homeowners stand to benefit. Under the program, the Fed can reduce what a homeowner owes on a mortgage, lower the interest rate, lengthen the term of a loan or take other steps to keep a loan from defaulting, if doing so would offer taxpayers a better long-term payoff than foreclosure.

The interesting thing is that this has been going on now for almost a year through reputable loan modification companies.

Scott Jenkins, a homeowner in Irvine CA, worked with Mortgage Modification Legal Network located in California and says. I felt like my mortgage company was giving me the run around and I needed help now. I contacted the Mortgage Modification Legal Network and my mortgage modification was done in 10 days. I truly believe that waiting on the government or federal programs would of landed me in a shelter or even worse.

This latest attempt to help homeowners should be taken with caution. The new policy applies only to mortgages the Fed controls through three companies formed to hold mortgage-related assets it acquired last year from the collapse of investment house Bear Stearns and insurer AIG. Those three companies hold roughly $74 billion in assets. That is only a fraction of the total troubled mortgages and mortgage-backed securities

As in the past government announcements seem to be the lifeline homeowners need to rescue them from foreclosure. Then you look at the fine print. Individual borrowers are unlikely to know whether their mortgages are owned by the Fed, but if they qualify for Loan Modification, they would deal only with their mortgage servicing company.

Trying to figure out if you mortgage is owned by the Fed is more than likely going to be a timely task, something homeowners facing foreclosure can not afford. A loan modification can stop foreclosure and is usually the best option for homeowners. It is recommended that you contact a loan modification attorney for assistance.

The Federal Reserve also announced it will use new tools to stimulate the economy and curb foreclosures. The Federal Reserve on Wednesday kept its benchmark lending rate near zero and said it’s likely to stay that way for some time, while also signaling new efforts to lower home mortgage rates.

The Fed left its target for the fed funds rate unchanged at a range of zero to a quarter-point. This ensures that most consumer lending rates will remain unchanged, too. The Fed promised new steps to boost lending to consumers. It also suggested that it would soon purchase Treasury bonds to decrease other lending rates notably, home mortgage rates and long-term corporate loans.

The Fed has also accepted collateral spurned by private lenders, expanded the kinds of institutions that can borrow from the Fed and extended repayment periods.

All this being said the probability of this having a big impact on the economy and foreclosures is low. A report on Friday is expected to show the economy contracted at a 5.4 percent annual rate in the final three months of last year, which would be the steepest falloff in activity for any quarter since 1982.