CB doubles down on dovish monetary policy

• Keeps key policy rates unchanged; SDFR at 4.5% and SLFR at 5.5%
• Slaps interest caps on mortgage-backed housing loans for salaried employees in both public and private sectors
• Banks to be issued with lending targets to fund areas with high growth and earning potential 
• SL had cut policy rates by cumulative 250bps up to July  

The Monetary Board of the Central Bank left its key policy rates unchanged yesterday, continuing with its dovish monetary policy stance by slapping interest caps on mortgage-backed housing loans and said lending targets would be introduced to licensed banks to channel funds into areas with high growth and earning potential. 

The rate setting committee, which met for the eighth and potentially the last time for this year, on Wednesday, to assess if the current stimulus is enough to get through the economic headwinds triggered by the pandemic, decided to leave its Standing Deposit Facility Rate (SDFR) at 4.50 percent and Standing Lending Facility Rate (SLFR) at 5.50 percent. 

“The Board, having noted the reduction in overall market lending rates so far during the year, stressed the need for a continued downward adjustment in lending rates to boost economic growth in the absence of demand-driven inflationary pressures, particularly considering the significant levels of excess liquidity prevailing in the domestic money market,” a Central Bank statement said.

The Monetary Board cut its key benchmark rates by 250 basis points in five instances from January through July this year, slashed bank rate to 8.50 percent, trimmed bank’s mandatory statutory reserve ratio to 2.00 percent and capped various administrative interest rates, to accelerate the transmission of the benefits of the eased monetary policy to the real economy. 
The latest of such actions was the Monetary Board’s decisions to cap mortgage-backed housing loans of salaried individuals of both in the private and public sectors at 7.0 percent and the intention to set lending targets for licensed banks to direct funds into high potential areas of the economy. 

“…licensed banks will be made to charge only 7 percent per annum for such loans, at least for the first five years of the loan tenure. The remaining tenure of the loan is to be charged at the monthly Average Weighted Prime Lending Rate (AWPR) plus a margin of up to one percentage point,” the statement said. 

This in effect gives life to a budget proposal, which proposed to provide loans to the public sector employees at a maximum interest rate of 7.0 percent. While the budget proposal confined the benefit to the public sector workers, the Monetary Board has encompassed the private sector workers into the scheme, to avoid 
possible discrimination. 

A direction to this effect is expected to be issued to licensed banks shortly with specifics. 

Meanwhile, in order to direct lending to productive sectors of the economy, as identified in Budget 2021, the Monetary Board will set lending targets for licensed banks to ensure these sectors will get the money required for their development, building industries, income generation and job creation. 

“The Board also recognised the need to promote economic sectors with higher growth and earning potential and in this regard, decided to introduce lending targets in the near future for selected sectors in conformity with the policies of the government.” 

While similar lending targets set in the past were less effective and weren’t even monitored rigorously by the regulator, this time, the situation could be different because the rates hover at historically low levels and the Treasury guarantees could come to buffer at least part of the credit risks of the lenders.