CB pledges to continue with “historically low” interest rates

• Expresses concerns on slowdown in credit disbursement to private sector and inadequate lending to productive sectors 
• Says would continue with its ‘guided yield’ policy by issuing directions prior to auctions
• New debt repayment structure for pandemic-affected biz likely after moratorium expiration in April

By Nishel Fernando
While expressing concerns on the recent spike in market interest rates and slowdown in credit disbursements to the private sector combined with inadequate lending to productive sectors, the Central Bank (CB) vowed to continue with the “historically low” interest rate structure until the economy shows signs of sustained revival.

Accordingly, the Monetary Board of Central Bank decided in its second Monetary Policy Review meeting held this week to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) at their current levels of 4.50 percent and 5.50 percent respectively.

Although, the CB was able to raise full amount offered at the latest Treasury bill auction held this week, the yields on 91 days, 182 days and 364 days Treasury bills jumped to 4.95 percent, 5.03 percent and 5.10 percent compared to 4.69 percent, 4.80 percent and 5.05 percent at the end of last year.

Commenting on the recent spike in Treasury yields, CB Governor Prof. W.D.Lakshmanyesterday stressed that CB would continue with its policy of ‘guided yield’, issuing directions prior to auctions.

The CB also acknowledged the recent slowdown in credit disbursements to the private sector and inadequate lending to the economy’s productive sectors.

In January, the banking sector granted Rs.25.7 billion worth of credit to the private sector, deaccelerating   from Rs.76.7 billion credit granted in December.

Further, CB data showed credit disbursements to productive sectors such as services and agriculture and fisheries remaining weak at the end of last year, while credit disbursements as personal loans and advances increasing rapidly. The CB is projecting 14 percent growth in private sector credit this year, and targets 20 percent of the credit growth to come from lending to micro, small and medium enterprises (MSMEs). Meanwhile, CB Deputy Governor T.M.J.Y.P. Fernando revealed that they have submitted a proposal containing a debt repayment structure for pandemic-affected businesses and individuals as the current moratorium in force is set to expire in April.

“That is currently under consideration. We already have received requests from a few sectors. We don’t want to overburden the customers with several payments, but we can’t also extend moratoria for everyone,” she said.
While noting that some sectors of the economy have already seen substantial recovery, she pointed out that the banking sector thus needs to meet interest payments on their customers’ deposits.

She assured that the proposed structure would strike a balance without burdening businesses and individuals with multiple loan repayments, allowing them to repay debt in a phased-out period. After securing Monetary Board approval, the Central Bank is expected to issue necessary directions to banks and other financial institutions in this regard.

The Central Bank forecasts 3-3.5 percent GDP growth for the first quarter of this year, while expecting the economy to grow at a much faster rate thereafter benefitting from the low-base effect to reach 5.5-6 percent GDP growth for the year.