Five more months for interest rates to reduce
Despite the banking regulator cutting down benchmark interest rates, it will take at least another five months before the banks reduce their rates up to the desired levels, bankers said.
Last week, the Central Bank (CB) reduced the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 200 bps to 11 per cent and 12 per cent.
While the full impact of the rate cut would take some time, some banks have already reduced their rates.
With the policy rate cut, and the inflation tapering down, the CB expects the banks and the financial sector to reduce the lending rates and stimulate the economy. “The rate cut will not be immediate for us. All banks are revising lending and deposit rates. It will take at least the year end for the rates to come further down, up to maybe 12 per cent,” a bank chairman told the Business Times.
It is a matter of urgency for the authorities to spur growth in the battered economy and reducing the rates will bring the cost of funds down, an economist said. This will not mean that businesses will borrow immediately, as the cost of funds is still too much for them, he added.
A banking analyst said that the fundamental rights case in the Supreme Court on Domestic Debt Optimisation is still a big concern among businesses.
The CB has warned that it will consider taking appropriate administrative measures to ensure the timely and adequate passthrough of accommodative monetary policy. Bankers allege that CB made too much regulation and banks are still struggling as a result. They say that it is important to let the market take its course because the cost of funds in some of the banks would have skyrocketed owing to CB imposing certain directions over the past three years. “Over regulation at this time, like taking administrative action to further reduce the interest rates in banks and financial institutions is not a good thing. The CB should allow the market to come to a certain level,” a banker said.
Some economists said that merely reducing rates will not spur the economy.
“The rates were artificiality increased to extremely high rates at 16.5 per cent. It is a good thing the rates are down – they shouldn’t have increased the rate at all last year,” Ahilan Kadirgamar, senior lecturer at the University of Jaffna told the Business Times.
The formal sectors saw 500,000 job losses last year, he said noting that lowering interest rates will not solve the larger economic issues in the country. “It will not address job creation unless the government stimulus the economy.”
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