CB cuts Bank Rate by 500bps to make emergency liquidity accessible and affordable

In another unprecedented move, the Monetary Board this week cut the Bank rate by 500 basis points, bringing the rate at which banks can access emergency liquidity to 10 percent as and when they require.   

At a meeting held on April 15 between the members of the Monetary Board, it was decided to bring down the rate from 15 percent to 10 percent considering the recent cuts in key policy rates and tied it to the movement of the ceiling policy rate, which is the Standing Lending Facility Rate (SLFR) with a margin of a plus 300 basis points.  
In a bid to contain the far reaching consequences to the economy from the business shutdowns imposed since mid March, Monetary Board took a slew of measures including back-to-back cuts in key policy rates by 25 basis points each in two inter-meetings, bringing the total reduction in key policy rates to 100 basis points for the year and 200 basis points since May 2019. 

“The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 15 April 2020, having observed the cumulative reduction of the key policy interest rates of the Central Bank, namely the Standing Deposit Facility Rate (SDFR) and the SLFR, by 200 basis points each since 31 May 2019, decided to allow the bank rate to automatically adjust in line with the SLFR, with a margin of +300 basis points,” a Central Bank statement said.   

“Accordingly, with effect from 16 April 2020, the Bank Rate, which is an administratively determined rate that could be used in periods of emergency, has been effectively reduced by 500 basis points from 15.00 percent to 10.00 percent,” it added. 

This is the latest such move by the Monetary Board to make available emergency liquidity for the banking sector should any bank requires. 

Last week the Monetary Board decided to release liquidity to the licensed finance companies through Sri Lanka Deposit Insurance & Liquidity Support Scheme for those companies who might run into liquidity shortages due to non recovery of loans and withdrawal of savings by customers. 

This is besides the reprieve given to them on capital and liquidity at an earlier occasion. 

Generally the first port of call for banks that need liquidity is the overnight money market at overnight rate and the next step is the SLFR window. However the third and the final option available for a bank to access liquidity is to borrow from the Central Bank at the Bank Rate. 

While accessing liquidity using the Bank Rate is rarely used, unless in the case of a bank run, some say the reduced rate makes it more compelling for them to borrow (at that rate) than raising deposits at over 10 percent. 
However, as lending rates are pushed down fast by cuts in policy rates in quick successions and when there is less appetite for new borrowings, there is little rationale for banks to offer higher rates for deposits. 

Banks anyway are mandated to maintain 20 percent of their deposits in liquid assets with the Central Bank.