Financial Times

HNB says possible hike in interest rates
The Hatton National Bank (HNB) last week said the lack of clarity as to how the government hopes to raise funds for a possible spending spree was putting pressure on market liquidity, possibly leading to a rise in interest rates.

While stating that policies of the new government are still unclear, HNB said what was clear so far is that the commitment for expenditure such as the subsidies, promises of new employment to large numbers and other such commitments made during election time will need huge resources in the form of direct funds.

"We are still not clear from what sources these funds will be generated. In these circumstances, there is a genuine concern that the market liquidity which was experienced in the past will gradually erode in a short time resulting in the rise in interest rates which will naturally have a chain reaction," the statement added

It said activity in many sectors during the first quarter slowed down as the main focus was on the impending general elections. "The uncertainty in the environment has naturally affected the performance in the financial sector broadly and more directly on banks like ours mainly due to low trading activities. We are now eagerly awaiting a clearer picture of the economic policies the new administration will follow," the statement said.

On its first quarter financial results - the main purpose of last week's statement - the bank said the first quarter of 2004 recorded a seven per cent increase in net income mainly attributed to a 12 per cent increase in net interest income and a 25 per cent increase in foreign exchange income.

However due to an 18 per cent increase in operational expenses, the bank's profits for the period showed a decline compared to the corresponding period of the previous year. For the period ended March 31, the bank recorded a pre-tax profit of Rs. 205 million and an after-tax profit of Rs. 181 million against Rs. 302 million profit before tax and Rs. 235 million profit after tax in the corresponding period of 2003.

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