• Benchmark short-term lending rate climbs to highest since July last year while Treasury yields ease in recent weeks 
• ICRA Lanka is of view that rising rates could blunt future credit growth 
• A leading bank chief is of opinion that rates wouldn’t hurt SME credit 
• Persistent concerns over forex, commodities shortages and soaring inflation raise bets on imminent rate hike 

The weekly Averaged Weighted Prime Lending Rate (AWPLR) eclipsed the 8.0 percent level last week, signalling that the present upturn in the market lending rates has more room to run its course, on the back of the prolonged shortages in the rupee and dollar market liquidity and persistently higher prices. 

The AWPLR, Sri Lanka’s benchmark short-term market lending rate, rose by 39 basis points to end at 8.03 percent last week, highest in 17 months, as the Treasuries yields and market interest rates started to rise since the Central Bank raised its benchmark interest rates in August and the investors started demanding higher yields to beat inflation, which rose to 7.6 percent in the 12 months to October.

The prime lending rate is a forerunner for what the lending rates elsewhere in the banking sector would look like in the coming weeks and months, as it is the rate banks quote for mostly short-term loans to their prime customers. 
During last week, there were a couple of banks, which quoted rates as high as 9.25 and 9.13 percent while the rest of the licensed domestic commercial banks quoted rates in the 8.0 percent range. 

On the contrary, bucking the weeks-long trend, Sri Lanka’s short-term Treasuries yields started easing from a fortnight ago, as the yields at the primary auctions fell across all maturities consecutively for two weeks. 
The benchmark one-year Treasury bill rate fell by two basis points last week to 8.17 percent.  
Analysts see more room for the market lending rates to climb, blunting the growth in credit flows into the real economy. 
Sri Lanka’s private sector credit, which rose by a multi-year high of Rs.134.1 billion in August, fell to Rs.29.1 billion in September but it maintained the annual growth at 13.8 percent, well within the desired range.  

“The short-term interest rates still have some room to move up. Therefore, we may see these adjustments taking place in the market in the next few weeks. Retail lending rates will also further adjust up, slowing credit in the process,” said the credit rating agency ICRA Lanka, releasing its latest monthly economic update. 

However, Hatton National Bank PLC (HNB) Chief Executive Officer Jonathan Alles said that while there is some upward pressure, the rates would still end at levels which wouldn’t hurt the ability to lend to the small and medium enterprises. 

“Yes, there is a little pressure for rates to move up. We can let it go up a little as long as it doesn’t go completely out of control,” Alles told a recent post-budget forum. 

“Still, transactions at SME level will be very much doable,” he added. HNB is the second largest private lender by assets. 

Meanwhile, the markets are betting on faster increase in key policy rates to arrest the current foreign exchange shortages and the rising inflation.  However, the Central Bank maintains that the monetary policy cannot address the supply-side price pressures and warned the premature interest rate hikes would stall the economy, which is recovering from the pandemic-induced troubles.  

“Especially if foreign currency is less available and there is going to be pressure on the Rs.1.8 trillion shortfall coming from T-bills and T-bonds, it can have an impact on the interest rates. We have already seen it, though it has kind of tapered in the last week or two,” Alles said in reference to the domestic financing projected to be made to bridge the budget deficit in 2022. 

Sri Lanka aims at reducing its budget deficit to 8.8 percent of gross domestic product in 2022, of which Rs.1.8 trillion is projected to be raised from the local market, as the government is planning to settle little under Rs.200 billion in foreign debt. 

“The thing is that at 5 percent and 4 percent, may be the rates were too low and Sri Lanka has seen rates at 15 and 20 and 25 percent and I don’t see it going anywhere close to that,” Alles said.  

“So, even if it moves up even by 100 or 200 basis points and somebody has to borrow at one percent a month or whatever, it’s pretty affordable and also it allows a little, say depositors to have something in it also for them because in the last couple of years, some of them, who rely on their deposits, have been earning 4-5 percent and found it very difficult,” he added.