Deposits rates log steepest annual declines in 2020 as monetary policy transmission holds

Deposit rates recorded their steepest decline in 2020 as the unprecedented monetary accommodation takes root more effectively and faster than any time in the history while the modest inflation in the country keeps real rates still at positive levels, the latest data showed. 

According to the data through December 2020, Average Weighted Deposit Rate (AWDR) of licensed commercial banks declined by 240 basis points (bps) or 2.40 percent in the twelve months from 8.20 percent in January to 5.80 percent in December. 

Headline inflation in the Colombo district was 4.2 percent while the national prices available up to November were up by 5.2 percent. 

The Central Bank at one point was somewhat perturbed by the disproportionate fall in deposit rates, but concluded that they were more concerned of the lending rates, which had more room to run their course. 

When the matter was raised with Central Bank Governor Prof. W.D. Lakshman recently, he said the Monetary Board is of the view that any potential issue with the deposit rate would be taken care of, when the economy takes off as expected from this year onwards, stimulated by both fiscal and monetary policy measures aimed at accelerating growth, and thereby the income of the people. 

“The Board’s consideration was that promotion of investments (loans) for the promotion of growth (economic) is very important. I am not saying that is more important than the deposit rates but once growth picks up over a period of time, then the consumers’ problems are ought to be soughed out over time,” he said. 

Meanwhile the Average Weighted Fixed Deposit Rate (AWFDR) fell by 2.91 percent during the twelve months to 7.14 percent by end-December from 10.05 percent in January 2020.

Although December-end data is yet to be released, the fall in Average Weighted New Deposit Rate (AWNDR) and the Average Weighted New Fixed Deposit Rate (AWNFDR) were higher than the fall in the average rate of the deposits in the entire commercial banking system. 

The AWNDR and the AWNFDR capture the average fall in the deposit rates in the near term. 

The two rates logged 3.82 percent and 4.03 percent declines respectively, during the eleven months to November 2020.