By:Staff WriterColombo (LNW):Sri Lanka kept its key interest rates unchanged in a surprise move on Thursday but announced caps on lending rates in some segments to ensure policy loosening done so far filters through to the economy.
Analysts had predicted a 100 basis point reduction but the Central Bank of Sri Lanka (CBSL) kept its standing deposit rate and standing lending rate unchanged at 11 per cent and 12 per cent respectively. CBSL had cut rates by a total 450 basis points over June and July.
The bank however said in a statement that interest rates on certain lending products remain “excessive” and downward adjustment in some sectors was “inadequate”.
“The Board was of the view that the downward rigidity in lending interest rates of certain financial institutions needs to be addressed through administrative measures,” it said.
“Such administrative measures would also ensure the swift transmission of previous monetary policy easing measures to all sectors of the economy”.
CBSL imposed an interest rate cap of 18 per cent per annum on pawning facilities, 23 per cent on pre-arranged overdrafts and 28 per cent on credit cards for all banks. It also said penal interest rates should be capped at 2 per centage points over the regular rate.
A circular focusing on measures to accelerate the fall in market lending rates is due to be issued by the Central Bank of Sri Lanka on Friday (25 Aug).
Accordingly, a circular is due to be issued tomorrow focusing on methods to ensure that the lending rates reflect the recent Monetary Policy relaxation, CBSL Governor Dr. Nandalal Weerasinghe explained.
He further added that the expectation of at least a 3% reduction in interest rates by December will also be reflected in these methods.
Dr. Weerasinghe made these remarks during a press conference held at the Central Bank this afternoon.
In late July, the CBSL governor had urged the licensed commercial banks to take immediate measures to adequately reduce lending rates in view of the policy interest rate cuts, stating that “Such rigidity of lending rates would be counterproductive in the process of envisaged economic recovery.”
Dr. Nandalal Weerasinghe, in a letter directed to the Sri Lanka Banks’ Association (SLBA) chairman, had emphasized that the Central Bank would be compelled to take administrative measures in the event the banking and financial sector fails to take adequate and expeditious adjustments in this regard.
Explaining that the central bank recently dropped the policy interest rates by 450 bps on two occasions with a view to enabling the economy to reach its potential while stabilizing inflation at mid-single digit levels in the medium term and easing pressures in the financial markets.
The governor said it is thus expected that market interest rates – particularly lending rates – will adjust downwards “adequately and swiftly”.
He further noted that such efforts would enable individuals and businesses to re-commence or continue the repayment of credit facilities and improve the sustainability of borrowers which will lead to a positive impact on the real sector resulting in the banking sector performance to improve.