Central Bank further reduces interest rates

Sri Lankan interest rates are being further reduced, with the decision to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points each, to 4.50 per cent and 5.50 per cent, respectively. 

This decision was taken by the Monetary Board of the Central Bank at its meeting on Wednesday July 8, the Central Bank said in a media release on Thursday.

“The board arrived at this decision with a view to inducing a further reduction in market lending rates, thereby encouraging the financial system to aggressively enhance lending to productive sectors of the economy, which would reinforce support to COVID-19 hit businesses as well as to the broader economy, given conditions of subdued inflation,” it said. 

Commercial banks are expected to release to the private sector borrowers the enhanced levels of liquidity effected by the reduction of the Statutory Reserve Ratio (SRR) by 300 basis points thus far during the year, which has 
also reduced the cost of funds of banks.

The statement said that on the external front, the trade deficit is estimated to have narrowed during the first five months of 2020, with the contraction in imports outweighing the contraction in exports. Reflecting the impact of measures taken to stem foreign currency outflows, the Sri Lankan rupee, which remained volatile briefly from mid-March to mid-April 2020, recorded a notable appreciation thereafter. Gross official reserves stood at US$6.7 billion by end June 2020, sufficient to cover 4.2 months of imports. 

“Despite high levels of surplus liquidity available to banks, credit extended to the private sector contracted significantly in May 2020. However, credit extended to the private sector is likely to pick up in the period ahead, supported by the expected sharp reduction in lending rates and highly concessional credit schemes introduced to support COVID-19 hit businesses. Meanwhile, the notable increase in credit to the public sector drove the increase in domestic credit as well as the overall monetary expansion during the first five months of 2020,” it said. (BS)