News
CB announces interest rate cut after blasts
View(s):The Central Bank of Sri Lanka (CB) on Saturday announced a 2 per cent cut in interest rates to small and medium enterprises (SMEs) in a move widely seen to propel business activities in the aftermath of the Easter Sunday bombings.
Listing out a series of measures, the CB said that while these would reduce excessive cost of funds borne by the financial sector, “it (CB) expects the lending rates to reduce by around 200 basis points (2 per cent) to SMEs in the near term”.
Economists including Economics Prof. Sirimal Abeyratne from the University of Colombo believe that while the cut in interest rates is largely to invigorate investment which has been lacking due to a high-interest rate regime in Sri Lanka, it may also be linked to enhance local investment if foreign investors shy away from Sri Lanka due to the Easter Sunday attacks.
“Interest rates (at an average of over 10 per cent) is too high for local investments and this step may be to address that situation. However one can’t rule out the possibility that this measure was also to address the immediate crisis and enhance business activities through reduced interest rates,” he told the Sunday Times.
The CB statement on Saturday said that the banking regulator has observed high interest rates charged on lending products and excessively high interest rates offered on deposit products by licensed commercial banks and licensed specialised banks and Non-Bank Financial Institutions (NBFIs) despite the measures taken to bring down overnight interest rates and enhance market liquidity through the reduction of Statutory Reserve Ratio (SRR).
“Especially in the context of well contained inflation and inflation expectations, Sri Lanka’s interest rates in real terms also have been found to be excessive in comparison to other regional economies,” it said.
Accordingly, the CB said it has requested licensed banks and NBFIs to reduce interest rates on deposits to accelerate monetary policy transmission through the financial sector, enabling licensed banks to reduce their interest rates on lending products in general, and to SMEs in particular, and thereby enhance credit flows to the real economy.