Sri Lanka’s central bank announced moves on Tuesday to make commercial banks lower their interest rates and increase lending to support an economy expected to grow 7.8 percent this year, while keeping its own policy lending rate unchanged.
The central bank held its reverse repurchase or standing lending facility rate at 8.00 percent as expected.
But it also restricted commercial banks use of its standing deposit facility (SDF) to three times a calendar month at the current 6.50 percent rate, and announced that further deposits would only receive 5 percent.
With treasury yields at below 6.3 percent, the 6.5 percent deposit rate had presented banks with a profitable arbitrage opportunity, but the lower deposit rate will now pressure them to boost their lending to customers.
“We see so much liquidity remaining in the system without being utilised for economic activity,” Central Bank Governor Ajith Nivard Cabraal told Reuters.
“With this move we expect banks to lend at cheaper rates.”
While the policy lending rate is already at multi-year lows, commercial banks’ lending rates are above 13 percent.
The central bank said in a statement that its moves aimed to encourage banks to lend to the “private sector at more reasonable interest rates, and thereby support the growth momentum of the economy, given the low inflation environment.”
For the remainder of September, banks can only use the standing deposit facility twice, the statement said. The central bank also suspended the daily auction facility with effect from Tuesday.
Top listed lender Commercial Bank of Ceylon immediately signalled its intention to cut.
“We are lowering our lending rates in line with the new decision,” Dharma Dheerasinghe, the bank’s chairman told Reuters.
REDUCED INFLATIONARY PRESSURE
The central bank said inflation is now projected to remain comfortably at around 3-4 percent by the end of 2014 due to the recent reduction in energy and fuel prices, having previously foreseen year-end inflation in a range of 4-5 percent.
Cabraal said he was confident Sri Lanka’s economy will achieve the 7.8 percent growth estimated for this year.
Cabraal expected private sector credit growth to pick up. The central bank said private sector credit growth for July “remained moderate”, but did not give figures. Credit growth was 2 percent in June, its lowest since April 2010, down from 2.2 percent in May.
Some banks and economists say they have not seen much demand for borrowing for investment, as consumer spending is declining due to higher taxes and lower disposable income. Analysts said a lack of transparency in government contracts had also dampened business sentiment.
The share index was up 0.3 percent at 0610 GMT and stockbrokers expected further gains due to increasing buying. The Sri Lankan rupee was steady at 130.30/35 at 0611 GMT, but dealers said it could fall due to a possible foreign outflow from government securities. (Reuters)