Interest-ing times
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Lower interest rates would stimulate economic and business activity, generate more borrowing from primarily small and medium scale businesses (SMEs) and create more jobs.This is primarily the reason why the Central Bank for the second time in recent weeks reduced interest rates last week making it a total 4.5 per cent rate cut which saw banks reducing their rates on borrowing and lending.
The gradual easing of restrictions on imported goods – in this case a further 300 items this week – would also generate more economic activity particularly for companies that relied on imported raw material.
So, is the economy doing okay or is the poverty levels (which have risen to 6 million from 3 million) still high in Sri Lanka? I sought responses to these issues when my young economist friend Ruwanputha called me on Thursday morning.
“Hello…,” he said. “Have you had time to analyse the recent rate cuts by the Central Bank and its impact on the economy?” I asked.
“I did some research on the interest rate cuts and the impact, speaking to three separate banks and this is the information I gathered:
Bank 1: Lending at 24 per cent has dropped to 18.5 per cent. Gold loans (pawning) was down to 19 per cent from 23-24 per cent. SMEs which take short term 3-month loans will feel the benefit of the rate cuts in the next cycle.
The AWPLR (Average Weighted Prime Lending Rate) was 19.17 per cent last week compared to 22.27 per cent a year ago. Interest rates for Treasury bills last week fell to 17.79 per cent for 3-month bills from 23 per cent at the previous auction. One year ago it was 32 per cent.
Rates for 6-month T-bills fell to 15.93 per cent from 19.49 per cent earlier and one-year bills fell to 13.86 per cent from 16.99 per cent earlier.
Deposits rates are now at 13 per cent compared to 18 per cent for one year deposits.
The rate cut can improve NPLs (non-paying loans) as people start paying back. Inflation is seen hovering at a single digit level in July from 12 per cent in June.
Bank 2: Deposit rates (FDs) were generally at 18-21 per cent, while other banks offered it at 25-26 per cent. These rates have come down to 10-11 per cent. Leasing was now at 18 per cent and earlier 23-24 per cent. Housing loans were now at 16 per cent but earlier at 26 per cent.
Bank 3: FDs were at 14.5 per cent and now 10 per cent. Lending rates were at around 30-32 per cent and have now come down to 24-26 per cent. “Will come down further?” he said.
“A more worrying problem for senior citizens and pensioners is that they depend on interest income and the new rate cuts would adversely affect their income. The government seriously needs to restore the special 15 per cent interest rate for senior citizens for deposits up to Rs. 1.5 million which was abandoned when interest rates rose above this rate. Otherwise, they would suffer badly,” I said.
“Absolutely, the old rates should be restored for senior citizens. In the meantime, inflation levels are coming down which would hopefully help bring down the cost of living which, however, won’t happen immediately as inflation is measured by the rate of increase and not the base measurement,” he said.
In a statement last week, the Central Bank said its Monetary Board decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 2 per cent to 11 per cent and 12 per cent, respectively. It said the Board arrived at this decision “following a careful analysis of the current and expected developments, including the faster-than-envisaged disinflation process and benign inflation expectations in the domestic economy, with the aim of enabling the economy to reach its potential and stabilising inflation at mid-single digit levels in the medium term,” while easing pressures in the financial markets.
“The Board expects that, with this reduction of policy interest rates by 2 per cent, and the reduction of policy interest rates by 2.5 per cent in early June 2023, along with the significant reduction of risk premia on government securities witnessed recently, the market interest rates, particularly lending rates, will adjust downwards adequately and swiftly. Therefore, the banking and financial sector is urged to pass on the benefits of this significant easing of monetary policy by the Central Bank to individuals and businesses, thereby supporting economic activity to rebound in the period ahead”.
After a long conversation, we agreed to meet for a longer chat.
As I walked to my office room, amidst a radio blaring in the neighbourhood playing some popular baila songs, my attention was drawn to the conversation by the trio under the margosa tree and interestingly they were discussing the same topic – interest rates.
“Raththaran ukas thiyena-kota banku walin ganna poliya den aduwela. Mama salli tikak hoyagena bankuwe thiyena mage raththaran podda ayin karanna oney (Gold pawning loans have come down. I must get some money and remove the little jewellery I have from the bank),” said Serapina, the youngest in the trio.
“Poliya aduwena eka apita honda nae. Banku-wala ithuru karapu salli walata labena poliya adu wenawa (Interest rates coming down is not good for us. If we have some savings in a bank, that interest rate will come down),” noted Kussi Amma Sera.
“Mage ne-de kenek masivili naganawa ithirum bankuwaka eyage thiyena podi thanpathaka adayama adu-wela kiyala (A relative of mine was complaining that his income from a small deposit in a savings bank has come down),” noted Mabel Rasthiyadu.
The statement by the banking regulator said that if the pass-through of such developments (lowering interest rates) is deemed to be inadequate and sluggish, the Central Bank will consider taking appropriate administrative measures to ensure the timely and adequate pass-through of accommodative monetary policy – meaning the possibility of further cuts in interest rates.
Winding up my column, I shouted out to Kussi Amma Sera to bring my second mug of tea from the kitchen. As I waited for my thirst quencher, my thoughts were on the need for the government to seriously consider restoring the special 15 per cent interest rate for FDs of senior citizens which they depend on as their only source of income.
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