CB cuts policy rates to cushion economic fallout from COVID-19

• Cuts both deposit and lending rates by 25 bps; slashes SRR by 1% to 4% 
• Says rate cut aimed at supporting economic activity amid COVID-19
• Extends support to govt. to raise required funds to tackle virus impact on economy
• Since Jan. CB has reduced policy rates by 25bps to spur economic activity

Sri Lanka’s Central Bank yesterday jumped on the rate cut bandwagon with other central banks in the world cutting key policy rates by 25 basis points (bps) to support economic activity in the country amid the rapid global spreading of COVID-19 pandemic and its possible further spread in Sri Lanka.

Accordingly, the Standing Deposit Facility Rate (SDFR) will come down to 6.25 percent and Standing Lending Facility Rate (SLFR) to 7.25 percent with effect from today.

The Central Bank also slashed the Statutory Reserve Ratio (SRR) on all rupee deposit liabilities of licensed commercial banks by 1 percentage point to 4 percent, with effect from the current reserve maintenance period.

A Central Bank statement said the rate cut was decided at an urgent Monetary Board meeting to review the monetary policy stance yesterday.

This was the second time the Central Bank slashed policy rates. In January, in support of the government’s fiscal stimulus, the Central Bank slashed policy rates by 50 basis points, though the SRR was kept untouched.

Confirmed COVID-19 cases in Sri Lanka had jumped over 20 as of yesterday.

“Sri Lanka’s economic growth, which has remained subdued for an extended period of time until end 2019, has begun to turnaround as a result of fiscal and monetary stimulus and the return of business confidence following the presidential election.

“However, it has increasingly become evident that domestic economic activity during the year 2020 would continue to be affected through various channels by the spread of the pandemic,” the Central Bank said. 

Earlier this month, the Central Bank said Sri Lanka’s economic growth could slump to 3.5 percent this year from earlier forecasted 4 percent plus growth as revenue from exports, tourism, remittances and logistics would be hit by the escalation of COVID-19 outbreak to a ‘global health emergency’ spreading beyond China.

The Central Bank was earlier projecting the country’s subpar economic growth to recover in the range of 3.7-4.5 percent driven by the fiscal and monetary stimulus.

Meanwhile, apart from the January 30 rate cut, the Central Bank had taken a number of measures to support the revival of domestic economic activity, in the context of well anchored inflation expectations and the absence of demand-driven pressures on inflation.

These include facilitating the implementation of the credit support package for borrowers in both performing and non-performing categories and the implementation of a credit guarantee scheme to revive non-performing advances, while maintaining dialogue with the financial market to ensure market lending rates continue to decline in line with the Monetary Law Act Order No. 02 of 2019. 

The Central Bank also assured the financial market of the provision of liquidity, as necessary to counter any impact arising from the evolving situation. 

The Central Bank said yesterday‘s rate cut would complement the measures that are already in place to stimulate economic activities in the country.

In the meantime, the monetary authority re-emphasised the need for all financial institutions led by commercial banks to ensure the full benefit of the cumulative reduction of 75 basis points in policy interest rates thus far during the year as well as the reduced cost of funds through the reduction in SRR are reflected in market lending rates without further delay.  In addition, the Central Bank requested financial institutions to refrain from engaging in speculative activity which could lead to panic in the financial market. 

“The Central Bank has put in place well-tested business continuity arrangements, which will be triggered as and when required to prevent any disruption to cash and electronic transactions and ensure the timely settlement of liabilities of the government and the Central Bank. 

The Central Bank is working closely with the government to ensure coordinated fiscal and monetary policy responses to mitigate the economic impact of the COVID-19 pandemic. 

In particular, the Central Bank will work with the government to raise the required funding for the government to tackle the current exceptional situation,” the Central Bank statement said.