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Central Bank renews lending and deposit interest rates

The Central Bank has issued a new directive on interest rates on lending and deposit products following the increase of policy rates by 7% earlier this month.

CB said having considered the tight monetary policy measures adopted thus far it was revoking previous orders which stipulated maximum rates that could be charged on (i) Credit card advances, commencing from the next billing cycle;

All new pre-arranged temporary overdrafts and existing pre-arranged temporary overdrafts are renewed/extended and All new pawning advances and existing pawning advances are also renewed.

Hitherto the maximum interest rate on Credit Cards was 20%; the maximum interest rate on Pre-arranged Temporary Overdrafts was 18% and the maximum interest rate on Pawning Facilities was 12%, Central BANK announced.

Licensed banks can also adjust the deposit rates adequately, in line with the tight monetary policy measures adopted by CBSL, to attract deposits into the banking system.

Weekly Average Weighted Prime Lending Rate (AWPR) for the week ending 22 April 2022 increased by 314 basis points (bps) to 14.20% compared to the previous week, according to CBSL. A year ago it was 5.5%.

In contrast the Average Weighted Deposit Rate (AWDR) was almost static at 5.17% last week from 5.07% the previous week and 5.2% a year ago.

Sri Lanka’s Central Bank doubled its key interest rates on Friday, raising each by an unprecedented 700 basis points to tame inflation that has soared due to crippling shortages of basic goods driven by a devastating economic crisis.

The Central Bank monetary board raised its standing lending facility to 14.50% and its standing deposit facility to 13.50%.

It cited “inflationary pressures that could further intensify… driven by the build-up of aggregate demand, domestic supply disruptions, exchange rate depreciation and the elevated prices of commodities globally”. Inflation hit 18.7% in March.

Having maintained a low interest rate policy stance for a long time, the Central Bank had to double the policy interest rates more recently due to heavy pressures of Government borrowing requirements.

This was reflected in the substantial under-subscription at consecutive Treasury bill auctions despite the sharp increase in yield rates.

The rise in interest rates is inevitable at this juncture given the exorbitant money supply growth that has led to accelerated inflation to double-digit levels by now.

Thiswas stated by former Central Banker, is Emeritus Professor of Economics at the Open University of Sri Lanka Prof. Sirimevan Colombage,

However, the steep rise in market interest rates following the policy rate hike is likely to be an unbearable shock to the ailing economy which is already battered by rupee depreciation, high inflation, fuel crisis, power cuts, food shortages, low international reserves, and foreign debt default, he added.

Such a severe interest rate shock could have been avoided had the Central Bank followed a flexible interest rate policy allowing the market forces to determine the rates depending on demand and supply conditions, he pointed out.

The cost of Government borrowing has already risen following the interest rate hike. This is reflected in the rise of the yield rate of 364-day Treasury bills to 15.69% at last week’s auction from 12.28% at the previous auction.

As the Government is compelled to increasingly resort to domestic borrowings in the coming months given the limited potential to borrow from abroad due to the declaration of foreign debt default, there will be further demand pressures on the domestic debt market.

This will result in a further increase in interest rates overburdening the Government coffers, he claimed.

In the meantime, the rising interest rates will lead to escalating production costs stimulating cost-push inflation.

This will have a negative impact on GDP growth which is already hit by multiple factors including high inflation, social and political instability, power cuts, energy crisis, raw material shortages, etc.

The rising production costs will also have detrimental effects on the already weakened export competitiveness

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