Money supply surges in Kuwait (page 2 of 2)

The NBK report states that banks saw an unusual rise in liquid assets in February, marked by a KD 184 million rise in current balances with the CBK.

The increase was accentuated by a continued drop in time deposits of local banks with the central bank, a scheme that the central bank relied on to mop up excess liquidity at banks between 2000 and 2002 when UNCC payments were adding considerably to domestic liquidity.

By late 2002, time deposits with the central bank started their steady decline as net outflows arising from increased imports and investments abroad drained some of this excess liquidity. Over the same period, bank holdings of Treasury instruments have seen little variability.

Though it may be too soon to draw any conclusions, it appears that the tools available to banks to manage their excess liquidity are becoming limited. Should banks continue to have excess liquidity on hand, this will most likely put further downward pressure on deposit interest rates.

Indeed, the increase in market interest rates seen during the later part of 2003 appeared to be cut short during the first two months of this year. The average rate paid on bank deposits was flat in January and lower in February, following increases seen during the last quarter of 2003.

Deposits placed at rates under 3% (the lowest tier for which data is available) began to grow once again in 2004 following declines seen during the second half of 2003. Average interest rates on 1-week customer time deposits in KD dropped the most by 0.26 percent, signaling the extent to which banks are flush with liquidity. Rates on interbank deposits also dropped by a larger magnitude.

According to the NBK report, rates on government treasury bills declined by 20 to 28 basis points during January and another 17 basis points in February.

The average rate on three-month treasury bills stood at 2.178% at the end of February, down from 2.456% at the start of the year. The average rate on six-month bills fell from 2.698% to 2.328% during the same period. Recent auctions for 3 and 6-month bills saw rates drop further to 1.69% and 1.48%, respectively.