The UAE's interbank rate, Eibor, keeps defying the market trend leaving the banking analysts confused about the role played by this benchmark.

Even as the Central Bank Governor Sultan bin Nasser Al Suwaidi said there is no need for additional liquidity support from the apex bank, the Emirates Interbank Offered Rate (Eibor) has steadily been rising ostensibly indicating that liquidity is still tight in the market.

Quite interestingly, recently a few banks including HSBC had announced cut in interest rate on mortgage loans whereas banks such as Mashreqbank have announced reduction in their base rate. Most banks have reduced their deposit rates also during the last four to six months. For example, Commercial Bank International (CBI) which used to advertise its rate at more than seven per cent a few months ago has reduced it gradually to about four per cent now.

Though Eibor made a reversal and started falling since October when the Central Bank restructured the way Eibor was computed, by taking rates offered by 12 banks, including four foreign banks, the rates have been steadily increasing since the start of the current year.

Talking to Emirates Business, Abdul Kader Hussain, Chief Executive of Dubai-based Mashreq Capital, said: "What I can say is that Eibor is not reflective of the market trend. I don't think any bank is relying on Eibor to determine their lending rates."

Most Eibor rates shot up during the two-and-a-half-month period since January 1, 2010 with some rates rising above the October levels.

While the one-week Eibor rose by more than 10 per cent since January 1, the one-month rate soared by more than 18 per cent, from 1.478 per cent to 1.747 per cent.

The rise in two-month and three-month rates was much more pronounced as they were close to 20 per cent.

While the two-month Eibor went up from 1.665 per cent to 1.995 per cent in 75 days, the three-month benchmark rose from 1.887 per cent to 2.246 per cent between January 1 and March 15, 2010. The six-month as well as one-year rates also improved by 12.44 per cent and 9.30 per cent respectively during this period.

According to analysts, once the looming uncertainty is resolved, banks will compete for market share as they are sitting on large funds and very comfortable capital adequacy ratio. "The banks are likely to re-enter the market through the secured loan windows and thereafter, we may see the lending taking place normally," said an analyst.