Central Bank reduces interest rates by 2 per cent
View(s):The Monetary Board of the Central Bank on Tuesday decided to drop benchmark interest rates by 2 per cent to jumpstart Sri Lanka’s economy which slowed down after the Easter Sunday bloody attacks last April.
In a statement on Tuesday, the Monetary Board said it decided to order the licensed banks to reduce interest rates applicable on all rupee denominated loans and advances by at least 200 basis points by October 15, 2019, in comparison to the interest rates applicable as at April 30, 2019, subject to certain exclusions.
With effect from November 1, in the case of credit card advances, the maximum interest rate applicable will be 28 per cent per annum, while in the case of pre-arranged temporary overdrafts, the maximum interest rates applicable will be 24 per cent per annum. Penal interest rates added to loans and advances have been capped at 400 basis points per annum, for the amount in excess of an approved limit or in arrears, during the overdue period with effect from October 15, 2019, the Central Bank (CB) said in a statement.
It said that over the past 11 months, the CB has taken a number of monetary and regulatory policy measures to induce a reduction in market lending rates. These measures include the reduction of the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the CB by 100 basis points in two steps, the reduction of the Statutory Reserve Ratio (SRR) applicable on rupee deposit liabilities of Licensed Commercial Banks (LCBs) by 2.50 percentage points that released around Rs. 150 billion of additional liquidity to the financial market, and the imposition of caps on rupee deposit interest rates offered by licensed financial institutions that enabled them to reduce the cost of mobilising funds from the general public.
“The CB has taken these measures with a view to supporting economic activity, given well contained inflation and inflation expectations. Further a slowdown observed in the economy following the Easter Sunday attacks has intensified the need for lower market lending rates. Meanwhile, the growth of credit extended to the private sector has decelerated sharply since the beginning of this year, and the non-performing advances (NPAs) have grown due to various factors. The CB is of the view that, these excessively high nominal and real lending rates are a key reason for slowing credit expansion and rising NPAs. In fact, Sri Lanka’s real lending rates are unacceptably high compared to its peer economies, and are not consistent either with the low inflation regime experienced by the country over the past 10 years and the expectations of 4-6 per cent level of inflation envisaged under the proposed flexible inflation targeting framework,” the statement said.
The CB said it will continue to closely monitor the movements in market lending rates to ensure a more effective transmission of monetary policy through the financial system. The CB also expects to review this order at end March 2020.