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.

Interest rates are the costs for borrowing money. The calculation for an interest rate is a simple expression of interest payments as a percentage of principal. Benchmark interest rates are set by an entities like the Federal Reserve, government, or a bank and are used to peg other consumer and commercial interest rates. These interest rates determine what we owe on mortgages, credit cards, and loans, as well as what we earn on CDs, savings accounts, money market accounts, and checking accounts. MoneyRates.com tracks the latest interest rate news and changes.

The forecast for higher interest rates has been extended as the Federal Reserve remains committed to maintain a policy of ultra-low interest rates. The released minutes from the last meeting of the FOMC suggest that the majority of Fed policy-makers are weighing the risks of economic slowdown as greater than those of inflation. Until economic activity picks up again in the US, it appears the Fed is satisfied keeping the federal funds rate set at 0.25% and the discount rate set at 3.25%. Mortgage rates remain low for home buyers and home owners according to the most recent survey of American lenders from Freddie Mac. The weekly survey released last Thursday indicated that many mortgage rate averages once again are at record lows. The national average on the 30-year fixed rate mortgage was unchanged from the previous week’s level of 4.57%. The national average on the 15-year fixed mortgage decreased slightly, dropping one basis point from 4.07% to 4.06%. Adjustable-rate mortgages indexed to US Treasury yields were mixed this week according to the Freddie Mac survey. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) increased to 3.85 percent and the 1-year Treasury-indexed ARM averaged fell to 3.74 percent. Adjustable rate mortgages tied to the LIBOR index, a common interest rate benchmark, were also slightly higher this week. The biggest catalyst for the record low mortgage rates in the US has been the continued support of the Federal Reserve of the housing market and the strong demand from investors for US Treasuries. Mortgage rates have been attractive enough to homeowners keep lenders busy with refinancings. Homeowners with fixed mortgages over 5.25% or variable-rate mortgages tied to interest-rate indexes have been advised to compare refinancing rates before interest rates increase again from today’s present levels. Check MoneyRates.com for the best mortgage rates and deals.

Short-term US Treasury yields have stayed in a very narrow range for the first half of July. The 90-day T-Bill is currently yielding 0.16% and the one-year T-Bill is yielding 0.27%, nearly unchanged from the yields that they ended with in June. The benchmark 10-year Treasury note yield can react strongly with economic news and releases. Today, the 10-year Treasury note is yielding 3.00%, but in the last 90 days it has ranged from 3.35% to 2.94%. Economists are forecasting that as the US economy picks up steam, that yields on Treasury notes and bonds could increase back over 4.5%. If the yields increase too quickly, investors who own government bond funds could see some loss in value.

Americans with home equity loans and credit cards that are indexed to Treasury yield averages should also be careful to follow the Treasury yield trend. This scenaraio is not likely before 2011, so savers may have a long wait before they see the +3% savings rates that they crave for their CDs, money market accounts, and savings accounts. Check MoneyRates.com daily for the latest interest rate news and forecasts.

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The Bank of Latvia kept its benchmark refinancing rate unchanged after lowering it three times in the last 16 months. The rate was held at 3.5%, Governor Ilmars Rimsevics told reporters in Riga.

The central bank cut its seven-day deposit rate by half a percentage point to 0.5%, and lowered the overnight deposit rate to 0.375% from 0.5% to spur lending in the economy. The bank has cut the main rate a total of 2.5 percentage points since March 2009.

Latvia exited the European Union’s deepest recession last quarter after exports and industrial production picked up, generating a 0.3% expansion from the previous period.

The economy may contract between 2% and 2.5% this year, Rimsevics said at the press conference.

“The Latvian Bank’s goal by lowering the deposit rates to promote lending will be difficult to achieve,” said Andris Larins, an analyst at Nordea Bank in Riga, in an e-mailed note. “The main obstacle to credit growth is the weak health of the economy and the comparatively small number of quality borrowers.”

Asking rates on the three-month Rigibor, the interbank lending rate, were at 1.96% today, close to a record-low 1.91%. The three-month rate climbed to a high of 29.8% on June 26 when speculation mounted that the country may have to devalue its currency.

The government was forced to turn to a group led by the European Commission and the International Monetary Fund in 2008 for a 7.5 billion-euro ($9.6 billion) loan to shore up the economy.

“Latvia does not need to borrow the whole loan” because it has sufficient funds in its reserves, Rimsevics said. The state will see borrowing costs drop after it adopts its 2011 budget, he said, adding that Latvia has no need to draw on its bailout for the remainder of the year.

Poland, the Czech Republic, Estonia and the Nordic states had previously agreed to lend Latvia money as part of its international loan program. The government agreed with its bailout donors not to enter bilateral loan arrangements beyond the IMF, EU deal, Prime Minister Valdis Dombrovskis said on June 7.

The refinancing rate affects the minimum interest rate on central bank swaps and repurchase agreements, worth about LVL 75 million lats a week.

Indonesian companies say bank lending rates that are well above Bank Indonesia’s benchmark rate are putting them at a disadvantage to their regional counterparts and hampering private-sector growth.

The central bank has cut its benchmark rate from a record high of 12.75 percent to 6.5 percent by last August, its lowest level since its introduction in July 2005.

But the average bank lending rate was still 12.5 percent in June, down from 14.43 percent in January. Domestic companies say this is still not low enough.

“Ideally for businesses, lending rates should be closer to the benchmark interest rate, so it should be in the single digits” said Ernovian Ismy, secretary general of the Indonesian Textile Producers Association (API).

“The relatively high lending rates are reducing the competitiveness of our industry” he said.

In a sign that Indonesian businesses are finding the rates too high, the level of undisbursed loans by Indonesian banks has stayed stubbornly high.

As of April, undisbursed loans stood at Rp 474.23 trillion ($52 billion) ” 32 percent of the total loans approved by all Indonesian lenders. The figure has risen by 27 percent from Rp 373.72 trillion in April last year.

Sugiarto Kasman, director of cooking oil producer PT Panca Nabati Prakarsa, said the high lending rates were making some Indonesian companies hesitant to take on additional risk, with many companies seeking to borrow money from overseas lenders that offer lower lending rates.

While the benchmark rate has come down from its highs, it is still relatively high compared to neighboring countries.

Malaysia’s benchmark rate is 2.5 percent and China’s is 5.31 percent. The Philippine’s benchmark is 4 percent, Thailand’s is 1.25 percent and Singapore’s just 0.13 percent. Lending interest rates in Singapore are in the 2.5 percent to 3 percent range, while in Malaysia it’s about 6 percent.

Indonesian exporters say lower lending rates would make their products more competitive abroad.

“The relatively high lending rates affect the competitiveness of both the price and quality of the products we export” said Jovian Agustinus, a director at PT 54 Resources, a mid-size company that exports organic vegetables to Singapore.

“To compete with locally made products in export target countries, we have to put a priority on quality and have a competitive price” he said.

“It’s hard to produce quality products cheaply with the high lending rates.”

The chairman of the Indonesian Cement Producers Association (ASI), Urip Timuryono, said if bank lending rates dropped to below 10 percent it would reduce monthly operational costs by 10 percent to 20 percent, allowing companies to allocate more funding to other needs.

PT Bank Central Asia’s director of credit, Dhalia Ariotedjo, said in May that bank lending rates were starting to fall because Bank Indonesia was encouraging banks to lower rates, fostering competition between lenders.

Fadil Hasan, an economist at the Institute for Development of Economics and Finance, said one of the reasons commercial banks had not decreased their lending rates more was because the competition between banks had only recently started to heat up.

“The increased competition has evidently led to the decreased lending rates, which will stimulate businesses due to the lesser burden” he said.

Standard Chartered Bank Indonesia economist Eric Alexander Sugandi said Indonesia’s relatively high benchmark interest rate was partly due to the country’s inflation rate, which was 2.78 percent in 2009.

By comparison, Singapore’s inflation rate in 2009 was 0.9 percent, while Malaysia’s was 0.4 percent.

Eric said that he expected bank lending rates to stay in the 12 percent to 13 percent range for the rest of the year.

Fadil said: “The government and central bank just need to keep an eye on the inflation rate that could begin to creep upward as a result of increased economic and business activity.”

Nigeria’s central bank kept its benchmark interest rate unchanged as it prepares to buy toxic debt from commercial banks to revive lending.

The monetary policy rate was left at 6 percent, Lamido Sanusi, governor of the Central Bank of Nigeria, said today at a briefing in Abuja, the capital. The main lending rate to commercial banks will be maintained at 8 percent and the borrowing rate at 1 percent.

The West African country’s Senate on June 23 approved a law to set up a state-owned company that will buy the debts from banks. The bank will clear $10 billion of toxic assets from the system this year, at a cost of about $5 billion, the governor said on July 1. The legislation is expected to get President Goodluck Jonathan’s approval soon, according to a central bank statement.

The debt purchases will “reflate the economy” Sanusi said. “Each bank has shown improved profitability compared with last year.”

The central bank fired the top managers of eight of the country’s 24 lenders last year and gave the industry an injection of 620 billion naira ($4.1 billion) to stem the decline.

Bank lending has been slow to recover. Credit to private industry fell in January, February and March, before gaining 0.3 percent in April, according to the central bank website.

Exchange Rate

The central bank is also likely to maintain its current exchange rate policy, which has kept the naira at about 150 to the dollar since February 2009, and helped maintain inflation between 10.4 percent and 13 percent since June, Sanusi said last week.

“It would be wise not to disrupt the balance” he said.

The inflation rate declined to 11 percent in May from 12.5 percent a month earlier.

The inflation and lending outlooks “have not changed significantly, so there is no real need to change anything at present” David Cowan, Citigroup’s Africa economist, said in an e-mail.

Nigeria’s economy, the second-largest in sub-Saharan Africa after South Africa, grew 7.2 percent in the first quarter and 7.4 percent in the previous three months, as oil production increased following a decline in attacks in the Niger Delta. Nigeria is the continent’s top oil producer and the fifth- largest supplier of U.S. crude imports.

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Sweden’s Riksbank raised the main lending rate a quarter-point from a record low as a government stimulus and revived demand for the country’s exports injected momentum into the economic recovery and pushed up house prices.

The world’s oldest central bank raised the benchmark seven- day repo rate to 0.5 percent, it said in a statement on its website today. The decision was forecast by 16 of 18 economists surveyed by Bloomberg.

“The cyclical uplift is very strong and growth seems to be fairly organic, encompassing both domestic demand and exports” said Nicola Mai, an economist at JPMorgan Chase & Co. in London, before the announcement. “They don’t want to end up in a situation that we have seen in many countries over the past couple of decades in which the housing market gets overheated and there is a massive correction.”

The Nordic region’s biggest economy grew more than economists expected at the start of the year and data revisions showed it exited recession in the second quarter of 2009. Unemployment dropped and industrial production expanded more than anticipated last quarter. House prices and household borrowing also grew.

Consumer prices, adjusted for mortgage payments, increased an annual 1.2 percent in May, compared with the Riksbank’s inflation target of 2 percent.

Recovery Road

“The economy is on the road to recovery” the National Institute of Economic Research said on June 23, forecasting 3.7 percent growth this year after last year’s 5.1 percent slump – the worst since World War II. “The turning point has been passed with the aid of an expansionary economic policy and a rapid upturn in demand for Swedish exports of goods.”

Gross domestic product expanded a quarterly 1.4 percent in the first three months of the year, Statistics Sweden said on May 28 as it revised contractions in the last two quarters of 2009 to show growth in both periods.

The government will spend 1.2 percent of GDP this year to stimulate growth before elections in September. Measures include a fourth income tax cut since 2006, infrastructure spending and programs to support the unemployed.

Retail sales rose an annual 2.7 percent in May, beating economists predictions for a 0.3 percent increase. Unemployment fell to 8.8 percent from 9.5 percent and exports, which account for about half of Swedish output, increased for a sixth month.

“Industrial firms forecast a continued increase in both output and employment for the next few months” NIER said on June 23 as manufacturing confidence rose to its highest level in three years in June. Swedish companies representing most major industries are enjoying a return to growth, the Riksbank said in a June 17 report showing rising showed production and orders.

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