Mid to long term lending rates start adjusting responding to policy rate hike in August

• But prime lending rate declined to 8% last week from 8.17% in Nov. 26

The medium to long-term lending rates have finally begun to adjust upwards after weeks of resistance since the policy rate hike in August, which pushed up the prime lending rate and the Treasury yields higher until they started levelling off as of late. 

However, the benchmark prime lending rate, which was on weeks-long upward run to surpass 8.0 percent and stayed at that level for two consecutive weeks reversed course last week. 

Prime lending rate, typically provides a forerunner for the rest of the market lending rates for every facility from term loans to SMEs, mortgage loans to consumer loans to credit cards. “We observed that market interest rates have increased reflecting the pass-through of tight monetary conditions”, said Dr. Chandrananth Amarasekara, Director Economic Research at the Central Bank. 

“And in particular we have seen the prime lending rate increasing by about 222 basis points thus far during the year,” he added. 

The weekly prime lending rate, which was on a weeks-long ascent to 8.17 percent on November 26 fell last week to settle at 8.0 percent. 

However, in a fresh development, the mostly watched and the widely affected Average Weighted New Lending Rate (AWNLR) climbed a steeper 64 basis points during October to 8.78 percent.

The markets wagered heavily for another rate hike at the last monetary policy meeting for the year held on November 24 to fend off inflation and also to keep the foreign exchange liquidity issues in check. 

The October increase in the new lending rate put the average rate for all facilities, which were disbursed most recently above 8.38 percent, when the rates touched the all-time low after Central Bank cut their benchmark rates to historically low levels to blunt the effects of the pandemic on the economy and its recovery. 

However, the AWNLR available up to November 23 was easing again to 8.14 percent, perhaps reflecting some pause in re-pricing the facilities by banks after some overreaction since the August policy rate hike. 

The data also showed continued deceleration in private sector credit during September and October, and  licensed commercial banks may have paused their rate hiking decisions until they get a clearer picture on the rate path from the monetary policy meeting which left their key policy rates unchanged. 

However, banks have raised their deposit rates significantly compared to the lending rates as the average weighted new fixed deposit rate had climbed 50 basis points to 6.19 percent by October end from September as they were offering attractive rates to woo funds to rebuild liquidity.