CB cuts rates to spur growth

• Expects swift and sizeable reduction in market lending rates
• Private sector credit decelerated to 9.9 percent in April

By Nishel Fernando 

The Central Bank (CB) cut policy interest rates by 50 basis points to stimulate the sub-par economic growth which is expected to further worsen due to the devastating impact on the tourism and related sectors stemming from the Easter Sunday attacks.

Accordingly, the Monetary Board of CB on Thursday in its third monetary policy review meeting decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 7.50 percent and 8.50 percent respectively. 

Sri Lanka experiences a continual slowdown in private sector credit growth and broad money supply (M2b) during the year contributed by high lending rates, sluggish economic activities and subdued business confidence. 

Following the relaxation of policy interest rates, the CB expects a swift and sizeable reduction in market lending rates which would support the economy’s recovery.

According to CB, private sector credit decelerated to 9.9 percent at the end of April and the credit to private sector in April recorded a net repayment of Rs. 43.4 billion in absolute terms resulting in a cumulative decline of Rs. 17 billion during the first four months of the year. 

The settlement of arrears by the government on account of various projects also partly contributed to the contraction of credit to the private sector. 

Driven by the slowdown in private sector credit, the broad money growth (M2b) also decelerated to 9 percent YoY compared to 13 Percent YoY in December last year.

The CB earlier imposed deposit rate caps for the banking, aiming to reduce market lending interest rate by 200 basis points or 2 percent. However, CB Governor Dr. Indrajith Coomaraswamy noted that the lending rates have only come down by 31 basis points so far, which is inadequate. 

He affirmed that if the banks fail to reduce their lending rates significantly, the CB will be forced to impose lending rate caps 
for banks.  

“In the coming weeks, we anticipate that banks would bring down their lending rates significantly. I’m confident that the banks will be cooperative and we will see this reduction. If not, the Monetary Board will need to consider imposing lending cap as well. Because, it’s clearly a national problem now and everybody has to play his/her part,” he elaborated.
Although the CB is yet to reverse the GDP growth forecast following the Easter Sunday attacks, the Governor noted that the GDP growth may fall below 3 percent this year from the earlier projected 4 percent growth. 

The negative spill over effects of the slowdown in the tourism sector is expected to spread to related subsectors such as hotels, restaurants, transportation, entrainment, hospitality, food and beverages and financial services. 

Further, the consumer confidence and business sentiment have been adversely impacted due to the terrorist attacks. 

However, Dr. Coomaraswamy remarked that following the Vesak festival, the consumer confidence and business sentiment are gradually normalising. 

The government is expected to revise the GDP growth forecasts once the first quarter GDP statistics are published in mid-June. 

The CB believes that the first quarter GDP growth would be significantly higher than 1.8 percent GDP growth recorded in fourth quarter of 2018, driven by an uptick in retail activities. 
Dr. Coomaraswamy noted that the slowdown in private sector credit this year wouldn’t immediately lead to a slowdown of the country’s economic growth. 

Despite the current uptick in core inflation, the CB expects the headline inflation to remain in the 4-6 percent range in the medium term.