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Key Market Lending Rate reaches two-year low, reflecting ongoing descent

April 22, Colombo (LNW): The market’s pivotal lending rate, closely monitored for its influence on a spectrum of loans from small businesses to mortgages, has reached a two-year low, sustaining its downward trajectory, a report by Daily Mirror disclosed.

Last week, the average prime lending rate, indicating the rate at which banks lend to their most creditworthy clients for short terms, experienced a decline of 22 basis points, settling at 10.41 per cent.

This marks a significant decrease from its level of 9.85 per cent observed on April 1, 2022, just before the Central Bank of Sri Lanka (CBSL) implemented a substantial interest rate hike of 700 basis points to curb inflation.

Both government securities yields and market lending rates have been on a downward trend over the past ten months, following the Central Bank’s decision to initiate rate cuts for the first time in June of the previous year.

The prime rate had reached its peak at 29.67 per cent in November 2022 amidst notably tight monetary policy measures.

Furthermore, Treasury bill yields also saw a decrease last week across all three maturities, hovering slightly above 10.0 per cent, closely aligning with prevailing policy rates.

In late March, the Central Bank reduced its key policy rates by 50 basis points to 8.50 per cent and 9.50 per cent levels, citing subdued inflation.

However, concerns arose regarding the influx of funds into the real economy.

Despite a pickup in private sector credit, the pace of growth fell short of expectations, prompting calls for banks to swiftly and adequately adjust their lending rates to reflect the easing monetary policy.

The current lending rates are anticipated to provide support for the economy, fostering an acceleration in recovery as individuals and businesses seek financing for consumption, growth, and investment.

Sri Lanka stands at the brink of a new credit cycle, with banks poised to disburse a potentially record-breaking amount of credit in the coming months.

This influx could bolster individual incomes, partially restoring the purchasing power eroded during the heightened inflationary period of 2022 and most of 2023.

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