Lankan interest rate cut lowest ever by CB – analysts
‘Interest’, the cost of using other people’s money is lower than it has ever been in Sri Lanka and will stay low for at least the next six months, industry analysts say.
Among the few vital signs that are monitored in arriving at this conclusion, Chandima Desinghe, CEO-Agora Securities (Pvt) Limited, a specialist intermediary in debt capital markets, told the Business Times that low inflation is amongst the topmost. “Three months ago, we felt that the drought, acting together with the base effect (an effect of the calculation method of inflation) would stress inflation in the fourth quarter of this year, but the surprising drop in inflation for August, reinforced by the recent cuts in fuel and electricity rates have dispelled these fears.
Inflation will stay at mid-single digits. Also, global supply side pressures are benign with oil and commodity prices in check,” he explained.
He also pointed out that there is presumably over Rs. 300 billion excess liquidity in the money markets which are well below deemed danger levels set by the Central Bank (earlier expected at 14 per cent now revised to 13 per cent for 2014) and credit expansion (the rate a which individuals and businesses borrow from the local banking sector) is quite low.
Analysts are at a loss as to why this is not picking up more briskly with borrowing rates so low and with so much excess liquidity floating around.
Fingers are pointed at pawn broking (a major borrowing segment) which virtually shut down when gold prices crashed and is only now recovering slowly, as well as to an over-cautious lending attitude by banks. “Also, lending concentration for government’s infra-structure projects is thought to be “crowding out” the private sector to some extent,” an analyst said.
Numbers do the talking
But credit expansion numbers are improving, analysts say. “The balance of trade and balance of payments figures are at healthy levels,” Mr. Desinghe said, adding that dollars are following in for projects and investments, through higher worker remittances, for share purchasing by foreigners, through growing tourism, and due to significant pickup in the export markets. “The Central Bank dollar reserve has swelled to record levels and improving further. In fact, they have recently been busy keeping the Rupee from appreciating and strengthening to unstable levels. Therefore, it is very unlikely that the rupee will come under pressure in the foreseeable future,” Mr. Desinghe said.
As to the government borrowing through public debt, Treasury Bills and Bonds, now they have cottoned onto more diverse methods like using the balance sheets of banks and other state related entities to borrow for government initiatives, and getting construction companies and developers to come with their own funding arrangements in order to qualify to participate in infrastructure projects. According to Mr. Desinghe, in this backdrop, a hike in rates in the in the near future is highly unlikely.
Through the last Monetary Policy action, the Central Bank instituted a “de facto”, or “for all practical purposes” rate cut. “Without calling it a formal reduction in policy rates, they significantly reduced the overnight interest rate paid by them for the excess funds of commercial banks. Their objective is to incentivise banks to more aggressively pursue lending money at lower rates,” the analyst said, adding that this is a step in the right direction.
“However, the Central Bank and the government have a civic duty towards the swelling numbers of retirees who depend on their interest income to make ends meet. These people have already seen a drop of about 60 per cent in their income. Can they afford to take a further hit? I believe the bigwigs are well aware of this sticky issue and their concern is reflected in the fact that the two state banks presently offer higher FD rates than any of the private sector banks,” he said.
According to another analyst, the Government has been able to borrow from international markets and it has drastically reduced the dependency on domestic borrowings, hence the rates could remain low, but he said that it’ll change only if the US starts jacking up their rates. “In this case funding cost from global markets would increase and that pressure to increase rates will also trickle down into the domestic market,” he said.
Historically, the Central Bank has only cut rates when the objectives they set when taking previous monetary action have been met. “In this case, a key objective of the last rate cut was to encourage people to borrow and invest towards growing the real economy. This objective has not yet been met.
Credit expansion (discussed above) is still very low going by June figures which are the latest available. Their recent action is towards fixing this.
When this is met, I feel a formal rate cut will be offered and recently instituted measures removed,” the first analyst said.