FD rates surge despite Central Bank saying seeing no hike in market interest rates

Sri Lanka’s third largest private bank, Sampath Bank PLC, yesterday raised its interest rates on 12-month fixed deposits by 100 basis points to 11.5 percent, just a day after the Central Bank insisted that there is no short-term upward trend in market interest rates. 

Commercial Bank of Ceylon PLC and Hatton National Bank PLC, the only two other privately held banks larger than Sampath Bank, maintained their 12-month rates for retail clients at 10.5 percent.

Sampath Bank’s latest annual report provided some insight as to why it is expecting higher interest rates in the coming year, with the bank saying that global markets are expected to remain volatile with changes in monetary and fiscal policy stances in developed economies such as the US, EU and the UK.

“The expected increase in interest rates by the US Federal Reserve and balance sheet normalisation by the EU is also likely to have a major impact on global interest rates and foreign exchange rates in many countries,” Sampath Bank said. It said that the Central Bank too would have to manage rising interest rates arising from these developments.

“In line with central banks in many Asian countries, it is anticipated that the Central Bank of Sri Lanka too would introduce measures to manage the rising interest rates and volatility in the local currencies stemming from the said developments,” Sampath Bank said.

Meanwhile, Hatton National Bank PLC had mixed views on interest rate movements, simultaneously predicting a fall in interest rates which would lead to higher domestic economic growth, while holding on to the same reservations as Sampath Bank.

“The anticipated rate hikes by the US Federal Reserve as well as Eurozone and the government debt repayments falling due may have adverse knock-on effects on the domestic interest rates,” Hatton National Bank said.

On Monday, the Central Bank said that based on its current projections on macroeconomic indicators, a ‘rational market’ would not expect an increase in interest rates.

“The Central Bank emphasises that based on its current projections, an increase in market interest rate is not expected in the near term,” the monetary and financial sector regulator said.

It is not yet clear which is irrational; the market or the Central Bank.

The Central Bank had said that it was making the statement in response to some speculative media reports which said that due to declining reserves, higher than expected imports and increased interest rates on government securities, market rates would rise.

During the first monetary policy review for 2018 in mid-February, the Central Bank said that domestic macroeconomic indicators signalled for a rate cut, but that its hand was stayed by rising global interest rates, since a local rate cut would precipitate a capital flight from Sri Lanka.