KARACHI: The State Bank of Pakistan (SBP) on Friday announced reduction in the interest rate corridor by 50 basis points aimed at improving the liquidity management.

With this announcement, there is no change in the SBP overnight reverse repo (ceiling) rate and it will continue at 9.50 percent pa. However, the SBP overnight repo rate has been increased from 6.50 percent to 7.00 percent pa.

This will serve as the ‘floor’ for the interest rate corridor. Hence, the floor and ceiling levels for the interest rate corridor will be 7.00 percent and 9.50 percent p.a. respectively, with a difference of 250bps as compared to 300bps previously. This change will be effective from February 11, 2013.

The SBP has also made it clear that, in case an eligible institution accesses either of the above facilities more than 7 times during a given quarter, a spread of plus/minus 50bps will be applied over and above the applicable SBP overnight reverse repo & repo rates, respectively for the remainder of the same quarter.

Bankers said that the decision to reduce interest rate corridor was taken with the objective of improving transmission mechanism by minimising short-term volatility in interest rates and to bring more transparency. In the emerging markets, interest rate corridor stands at 200bps, while in advanced economies it is some100bps.