Central Bank cuts policy rates further to support economy

• Cuts policy rates by 50 basis points, banking on subdued inflationary pressures 
• CB has reduced policy rates 150 basis points so far this year, in four occasions 
• Notes market lending rates have not declined in line with reduction in policy rates
• Warns of regulatory action to bring down market lending rates

The Monetary Board of the Central Bank of Sri Lanka, at a special meeting held yesterday, decided to reduce the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points, to 5.50 percent and 6.50 percent, respectively, effective from the close of business on May 6, 2020. 
So far this year, the Central Bank has reduced policy rates by 150 basis points, in four occasions.

The Statutory Reserve Ratio (SRR) remains unchanged at 4.00 percent.

“The Board arrived at this decision considering the necessity to further support the economy to weather the adverse economic impact caused by the COVID-19 pandemic, given the subdued inflationary pressures,” the Central Bank said in a statement.

Apart from reducing the key policy rates, the Central Bank has taken a number of other measures to ease monetary conditions in the market, due to the coronavirus pandemic-induced economic woes. 

However, the Central Bank noted that market lending rates have not declined in line with the series of measures taken to ease monetary policy and monetary conditions thus far during the year.

“Therefore, financial institutions are urged to reduce lending rates without further delay, failing which, the Central Bank will be compelled to take appropriate regulatory action to bring down market lending rates,” the Central Bank warned.

The Monetary Board of the Central Bank in April reduced the bank rate by 500 basis points, from 15 percent to 10 percent, to aid in efforts to counter the impact of COVID-19 on the economy. It also allowed the banks to draw down from the capital conservation buffer and eased minimum capital rules.