CB sets new maximum interest rates on foreign currency deposits 

The Central Bank yesterday issued fresh instructions to be followed by licensed commercial banks and the National Savings Bank when determining what the maximum interest rates on foreign currency denominated deposits would be, effective from today (December 31, 2021). 

According to the guidelines, banks are required to offer a maximum of 5 percent or average 1-year Treasury bill yield determined at auctions during the last calendar month of the previous quarter, less 150 basis points, for deposits carrying maturity of one year or below. 

And for deposits, “with a maturity of more than one year shall be determined based on market behaviour,” the Monetary Law Act order issued yesterday said.  

This slightly modifies the earlier guideline, which was based on the single criterion of not exceeding the annual effective interest rate of 5 percent per annum for foreign currency deposits, issued on August 24, 2021. 
The Central Bank in August decided to cap the maximum interest rate offered on foreign currency deposits with the intention of dissuading exporters and others holding dollars in foreign currency deposits, in a bid to resolve the shortage in the domestic foreign currency market.

This order came on the heels of the Central Bank raising policy rates by 50 basis points on August 19 to resolve the anomalies developed in the foreign exchange market by reducing the interest rate differential in the rupee and dollar markets.

The new order will be applicable on the new foreign currency deposits, existing foreign currency savings deposits and at the renewal of th foreign currency term deposits. 

However, the Special Deposit Accounts currency introduced last year will continue to receive the additional 2.0 percent interest rates over and above the maximum interest rate determined under the new guidelines issued yesterday. 

At this week’s primary bill auctions, the 1-year bill yield jumped 22 basis points to 8.24 percent. 
Meanwhile, issuing instructions on the swap cost between USD/LKR, the Central Bank asked banks to execute such swap transactions subject to a maximum US dollar interest rate of 10 percent per annum. 

“Accordingly, the USD/LKR swap points shall be pro-rated based on the above benchmark USD interest rate for the respective tenors until further notice,” the order stated.