Prime lending very close to policy rate corridor

The average prime lending rate, the rate at which banks lend to their big corporate clients for a very short period, continued its weeks-long descent and ended at 9.65 percent, very close to the policy rate corridor.

During the week ended May 17, the average weighted prime lending rate shed another 27 basis points to settle at 9.65 percent after falling 23 basis points the week before.
This is the lowest rate in over two years on March 18, 2022 when the rate was 9.46 percent.
Thereafter, the prime rate and government securities yields went through the roof when the Central Bank on April 8, 2022 raised the policy rates by 700 basis points and again by another 100 basis points, when it totally misread the inflation.

As a result, the prime rate peaked at 29.67 percent in November that year.
Central Bank’s Standing Lending Facility Rate or the policy rate, at which it lends money to banks, is currently at 9.50 percent.
The economy has seen a faster decline in its interest rates so far this year as the money market operates with excess liquidity and the banks are actively looking for opportunities to lend out their excess liquidity in their balance sheets to the real economy.

The first quarter earnings of the banks showed, though with mixed results, re-opening their lending spigots and setting aside lesser amounts for possible problematic loans as they become more confident about the economy and the path of interest rates.
The Purchasing Managers’ Index data showed that the economy continues humming despite the seasonal sluggishness in April, and especially the services sector is being driven by the lower interest rates.

Sri Lanka is currently seeing a beginning of a fresh credit cycle as both individuals and the companies are growing more confident about borrowing for their housing needs, consumption, expansion of their business activities and investments.
Construction sector has been expanding with projects coming back on line, but the full recovery could be a far cry until the government loosens its purse strings, kicking out the International Monetary Fund claptrap.