All banks asked to take swift measures to reduce lending rates

Monetary policy easing will be paused in the near term giving space for market interest rates to adjust downwards in line with the current and past monetary policy easing measures, the Central Bank of Sri Lanka (CBSL) stated on Friday in its review of the latest monetary policy stance.

“The Board stressed the need for all licensed banks to take swift measures to reduce market lending interest rates to ensure that the benefits of the series of monetary policy easing measures are adequately passed on to businesses and households”, it said.

This statement made it clear that the CBSL is closely watching the extent and speed of the pass-through from monetary policy to the deposit and lending rates of Sri Lankan banks and how it would impact the economic activity in the near term.

“The Monetary Policy Board of the CBSL, at its meeting held on 23 November 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points (bps) to 9.00 per cent and 10.00 per cent, respectively. The Board arrived at this decision following a careful analysis of the current and expected developments in the domestic and global economy, with the aim of achieving and maintaining inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach and stabilise at the potential level,” CBSL said.

“The Board took note of possible upside risks to inflation projections in the near term due to supply-side factors stemming from the expected developments domestically and globally. However, the Board viewed that such near-term risks would not materially change the medium-term inflation outlook, as inflation expectations of the public remain anchored and economic activity is projected to remain below par in the near to medium term,” it added.

“Further, the Board viewed that with this reduction of policy interest rates, along with the monetary policy measures carried out since June 2023, sufficient monetary easing has been effected in order to stabilise inflation over the medium term. Hence, the Monetary Policy Board underscored the need for a swift and full pass-through of monetary easing measures to market interest rates, particularly lending rates, by the financial institutions, thereby accelerating the normalization of market interest rates in the period ahead,” it noted.