Sri Lanka’s Central Bank is to issue guidelines to direct banks to cut lending rates and narrow the gap with the inflation rate, central bank Governor Ajith Nivard Cabraal said.

“We feel the prevailing lending rates should be less than where they are now,” Cabraal told a forum in Colombo.

He said the difference between banks’ lending rates, which have been above 15 percent, and inflation had been 8 percentage points, whereas the gap in other countries was between 3 and 5 percentage points.

“We are planning to issue some guidelines in future on this regard. If we need to maintain economic growth at a consistent level, we need to maintain (lending) interest rates in line with other countries.”

Cabraal did not elaborate on the planned measures.

Strong loan growth from lossmaking companies has enabled Sri Lanka’s commercial banks to maintain high interest rates even as the central bank has cut its main policy rates.

It has cut its repurchase and reverse repurchase rates by 100 basis points in total since December to 7 percent and 9 percent respectively. At a meeting on Friday the central bank left rates on hold as expected.

The inflation rate rose in May to 7.3 percent, from 6.4 percent in April.

Analysts, however, said reducing lending rates could discourage saving and thus investments as banks could opt to cut deposit rates sharply.

“The central bank also should consider that the reduction in lending rates could also discourage foreign investors in government securities. If they start to withdraw rapidly, then we might face a balance-of-payments crisis,” one analyst said on condition of anonymity.

Foreign investors hold 13.7 percent or 497.1 billion rupees ($3.93 billion) worth government securities out of a total outstanding 3.62 trillion of treasury bonds and bills.

(REUTERS)