Prime lending rate falls below 12% after nearly two years

Despite treasury bill yields manifesting some stickiness from coming down in recent weeks, the prime lending rate has continued to ease and the benchmark rates last week fell below 12.0 percent levels for the first time in nearly two years.

This is a welcome sign for both the borrowers as well as the economy which was for far too long under the grips of sky high rates.
According to the data, the weekly average prime lending rate, the rate at which the banks lend to their prime customers or the customers with higher credit ratings for short term fell to 11.87 percent last week from 12.13 percent a week before.

A year ago, the prime rate stood at more than twice the current levels at 28.07 percent, an ultra-restrictive level which effectively prevented  both borrowing and lending as the Central Bank bone crushingly tightened the monetary policy to combat the runaway inflation which peaked at 70 percent.
The last time the weekly prime rate was below the current levels was back in roughly 21 months ago on April 12, 2022 which the rate was at 11.06 percent, just beginning its sharp rise after the previous week’s jumbo policy rate hike by 700 basis points.

Central Bank Governor, Dr. Nandalal Weerasinghe recently told that he sees the possibility for the benchmark short term lending rate to come down to single digit levels in the near future should the inflation remain at their target level of 5.0 percent in the medium term.

It wasn’t however clear if the single digit prime rate is possible under the current policy rates or after further easing as he hinted at a possible cut in key policy rates at a future meeting, although he didn’t specify at which meeting.
After cutting key policy rates in November by 100 basis points, the Central Bank said it would leave the rates at these levels for sometime before making any moves to provide room for the market lending rates to adjust by themselves as they see scope for such rates to come down.

Currently the key policy rates stand at 9.0 percent and 10.0 percent respectively.
The Central Bank is also expecting a somewhat accelerated credit cycle in 2024 made possible by the softening rates helping to accelerate the recovery in the economy which set off to a modest growth in the second half last year.