Central Bank expects banks to further reduce interest rates

The Central Bank (CB) expects banks to further reduce interest rates as it has so far failed to bring down the rates to the expected level of the monetary authority, CB Governor Nanadalal Weerasinghe disclosed at the first monetary policy review media conference in 2024 in Colombo on Tuesday.

He noted that three to six month Treasury bill rates have been in the declining trend and the market interest rates also came down recently aimed at supporting economic activity in the context of a low inflation environment.

In addition to allowing increased currency flows in the economy, large liquidity injections to the banking system enabled banks to provide the support required by businesses and individuals to tide over the difficulties.

Key monetary policy instruments such as policy interest rates and the Statutory Reserve Ratio have been reduced and it is still being maintained, he pointed out.

Therefore the bank rates will have to be reduced to ease the burden of borrowers who were facing various difficulties, he said.

The Central Bank has expected a continued decrease in market lending interest rates in the upcoming period.

This anticipation follows the ongoing adjustment of market interest rates in line with a relaxed monetary policy and administrative measures aimed at reducing overall lending rates, the CB said in its monetary policy review.

The Monetary Policy Board of the Central Bank believes that there is still room for market interest rates, specifically lending interest rates and yields on government securities, to decline further. This outlook aligns with the recent reduction in policy interest rates.

The board highlighted the sustained decline in yields on government securities, supported by decreasing risk premia. It anticipates that this trend will extend to market lending interest rates, contributing to a more favourable economic environment. (Bandula)