Further space remains for market lending rates to decline: CBSL holds policy rates steady
The Monetary Board of the Central Bank of Sri Lanka (CBSL) has announced that it has decided to keep its key policy interest rates unchanged for October.
The Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 4.50 per cent and 5.50 per cent, respectively.
However, the CBSL said that despite the resurgence of COVID-19 cases, the private sector credit growth was boosted by the easing of monetary policy measures this year as well as lower market interest rates and the introduction of concessional credit schemes. According to CBSL, the imposition of lending rate caps on selected financial products in August 2020 has also helped bring down the overall lending rates in the market. Further space remains for market lending rates to decline, particularly with the high level of excess liquidity in the money market, which is deposited with the Central Bank at the SDFR of 4.50 per cent at present.
“The expansion of credit to the private sector is expected to continue in the period ahead, despite the recent rise in COVID-19 infections, which is expected to be a short-term problem,” it stated.
CBSL slashed policy rates five times this year, taking the cumulative monetary easing to 250bps.
CBSL expects that the 2Q of 2020 has recorded a greater contraction than the first quarter, followed by a recovery in the 3Q of the year. Developments in some leading indicators suggest that Sri Lanka is on the path to economic revival. However, the new COVID-19 cluster could somewhat affect this momentum in the short-term.
The recent increase in food prices is expected to be short-lived supported by domestic supply side developments as well as the recent reduction in prices of several essential goods. Accordingly, inflation is expected to remain broadly within the desired 4-6% range in the near to medium term, with appropriate policy measures.
The imposition of lending rate caps on selected financial products in August 2020 has also helped bring down the overall lending rates in the market. Further space remains for market lending rates to decline, particularly with the high level of excess liquidity in the money market.
The release of the next regular statement on monetary policy will be on 26 November 2020.