Sri Lanka’s central bank lowered its key interest rates for the fifth time this year as it seeks to lower lending rates further and encourage the financial system to “aggressively” lend to productive sectors of the economy to boost activity at a time of subdued inflation.
The Central Bank of Sri Lanka (CBSL) cut its two key interest rates, the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR), by 100 basis points each to 4.50 percent and 5.50 percent, respectively.
It is CBSL’s fifth rate cut this year and the deposit rate has now been cut by 250 basis points following earlier cuts in January, March, April and May.
Todays rate cut is also the central bank’s 7th cut since May 2019, with the rate cut by a total of 350 basis points since then as it continues to stimulate the take-up of credit by businesses that were first hurt by the 2019 Easter Sunday bombings and then the COVID-19 pandemic.
The central bank said it would continue to monitor domestic and global economic conditions and “take further measures to ensure that the intended outcomes of already implemented policies are realized.”
Although the central bank expects an economic rebound in the second half of the year, after the economy was “severely affected” during the second quarter, it said it was imperative to introduce growth promoting and confidence enhancing structural reforms to foster high and sustainable growth in the medium term.
Sri Lanka’s gross domestic product slowed to annual growth of 2.0 percent in the first quarter of this year from 2.4 percent in the previous quarter and in the month of May the country had no tourist arrivals, as in April, as all passenger arrivals were terminated from mid-March to prevent the spread of the coronavirus.
As in previous months, the central bank called on financial institutions to fully pass on the cumulative cuts of 250 basis points interest rates, adding it also expects banks to use the additional liquidity freed up by its cut to the reserve ratio of a total of 300 points to boost lending to productive sectors of the economy.
“However, further space remains for market lending rates to adjust downwards commensurate with the series of easing measures taken by the central ban thus far during the year,” CBSL said.
Reflecting authorities’ measures to stem the outflow of currency, Sri Lanka’s rupee has strengthened since mid-April after falling in March and was trading at 185.9 to the U.S. dollar today, down 2.3 percent this year.
Sri Lanka’s reserves were US$6.7 billion at the end of June, enough for 4.2 months of imports.
Sri Lanka’s inflation rate eased slightly to 3.9 percent in June from 4.0 percent in May.
The Central Bank of Sri Lanka issued the following statement:
“The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 08 July 2020, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points each, to 4.50 per cent and 5.50 per cent, respectively. The Board arrived at this decision with a view to inducing a further reduction in market lending rates, thereby encouraging the financial system to aggressively enhance lending to productive sectors of the economy, which would reinforce support to COVID-19 hit businesses as well as to the broader economy, given conditions of subdued inflation.
The spread of the COVID-19 pandemic has significantly impacted near term growth prospects globally, while available indicators for Sri Lanka also suggest that economic growth is likely to have been severely affected during the second quarter of 2020. Although a rebound is expected during the second half of the year with the support of monetary and fiscal stimulus measures, the introduction of growth promoting and confidence enhancing structural reforms is imperative to foster high and sustainable economic growth over the medium term.
On the external front, the trade deficit is estimated to have narrowed during the first five months of 2020, with the contraction in imports outweighing the contraction in exports. Reflecting the impact of measures taken to stem foreign currency outflows, the Sri Lankan rupee, which remained volatile briefly from mid-March to mid-April 2020, recorded a notable appreciation thereafter. Gross official reserves stood at US dollars 6.7 billion by end June 2020, sufficient to cover 4.2 months of imports.
In consideration of the need to support a rapid recovery of the economy, the Monetary Board, at its meeting held on 08 July 2020, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points each to 4.50 per cent and 5.50 per cent, respectively, with effect from 09 July 2020. The Monetary Board wishes to strongly reiterate that all financial institutions led by licensed commercial banks (LCBs) must pass on the full benefit of the cumulative reduction of 250 basis points in policy interest rates thus far during the year without delay. LCBs are also expected to release to the private sector borrowers the enhanced levels of liquidity effected by the reduction of the Statutory Reserve Ratio (SRR) by 300 basis points thus far during the year, which has also reduced the cost of funds of banks. Such additional liquidity must be used to lend to productive sectors of the economy, along with concessionary credit schemes already announced by the Central Bank to help needy sectors of the economy. The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments and take further measures to ensure that the intended outcomes of already implemented policies are realised.”
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