24 January 2024 12:23 am Views - 223
Despite a notable reduction in interest rates from last year’s peak, driven by previous rate cuts and targeted monetary policies, certain banks are yet to align their rates with the Central Bank’s expectations.
The Central Bank has implemented a substantial 650 basis points cut in its key policy rates since June of last year, initiating one of the most robust cycles of monetary easing. This strategic move aims to address both subdued inflation and propel the economy towards a much-needed rebound from an extended period of contraction.
In August, the Central Bank mandated lower ceiling rates on select lending products, urging banks to reduce other rupee lending rates by 250 and 350 basis points by October and December, respectively, from July levels. Since then, both the average prime lending rate and the average new lending rate have decreased.
The prime rate, reflecting loans to the most creditworthy clients, dropped to 11.78 percent last week from 17.18 percent in July and 27.54 percent a
year ago.
Meanwhile, the average new lending rate, indicative of loans to small businesses, settled at 14.38 percent by December, compared to 22.42 percent in July and 26.20 percent in December 2022.
But Central Bank Governor, Dr. Nandalal Weerasinghe said there are few banks which are yet to bring down their rates to the level stipulated in the order and is of the view that these rates and the treasury yields have more room to come down considering the totality of the monetary easing delivered last year.
He said they would talk to these banks to get them to adjust their rates to the levels the Central Bank deems appropriate given where the policy rates stands and the falling risk premia of the government securities.
“In particular, the Board anticipates a broad-based reduction in overall market lending interest rates in line with the monetary policy easing measures effected since June 2023.
Nevertheless, banks currently function with substantial deposits accumulated when interest rates were elevated, ranging between 25 to 30 percent in 2022 and the early part of 2023.
This predates the ease in financial conditions, triggered by enhanced foreign currency liquidity, the approval of the External Fund Facility by the International Monetary Fund, the announcement of the domestic debt optimisation programme excluding banks, and the relaxation of monetary policy.