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AAGM: National Bank in a Fix Over Excess Liquidity.
(From New Vision (Uganda): AAGM)
Byline: Steven Odeu
Bank of Uganda (BOU) is caught up in a situation where it has to ignore the fear that commercial banks are likely to raise lending rates and go ahead to mop up excess liquidity by offering Treasury bills at rates higher than the previous months.
According to the latest "Economic and Financial Indicators" from the Central Bank, Treasury bill rates rose further during the month of June 2002 as compared to the past five months. This could force up interest rates on borrowers.
The inter-relationship between Treasury bill rates and prime lending rates, is that Treasury bills are offered by Government and are risk free, making them more attractive to commercial banks.
If T-bills are offered at a lower rate, the banks find it attractive to lend to the public by lowering interest rates. If the T-bills were offered at a higher rate, the commercial banks would rather buy the bonds and ignore lending by raising interest rates.
Movements in T-bill rates therefore largely determine the interest rates trend.
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