Deposit rates fall further as dovish monetary policy continues to adjust market rates

• Weighted average deposit rate falls 21 bps in Oct. to 6.23%, with cumulative decline of 1.97% up to now
• Weighted average fixed deposit falls 31 bps to 7.59%, with cumulative decline of 2.46% so far this year

Deposit rates fell further in October, continuing its descent into the 10th consecutive month since the Monetary Board turned dovish in January, reflecting the highest level of monetary policy transmission efficacy in recent history.

To this end, the weighted average deposit rates or the average cost of the entire deposit base of licensed commercial banks, fell by 21 basis points (bps) to 6.23 percent during October, bringing the cumulative decline in the rate to 1.97 percent. 

Meanwhile, the weighted average fixed deposit rate or the average rate of all-time deposits in the commercial banking system, which mostly represents the short to medium-term deposits of both individuals and corporates and particularly of retirees, fell by 31 bps to 7.59 percent. 

The October decline brings the total decline for the year to 2.46 percent. 

However, the senior citizens are paid 15 percent for their deposits up to Rs.1.5 million and the Colombo inflation softened to 4.0 percent in October, from a year ago, putting a higher real return on the hands 
of depositors. 

Another reason for the continued decline in the rates offered for the depositors is that the banks are repricing their liability portfolio as fast as they could, to safeguard their thinning margins, as the lending rates have been on a precipice since last five months.  

The average prime lending rate touched a fresh low of 5.72 percent during the week ended on October 22, before making a slight gain to 5.85 percent in the following week. 

So far, the benchmark short-term lending has fallen by 399 bps or 3.99 percent, compared to the 250 bps cut in key policy rates.  The Monetary Board, which met for the seventh time for this year on October 22, left the key policy rates, as earlier actions still have more room to adjust market interest rates and expected the prices in the economy to remain at their desired mid-single digit level.