8 February 2021 09:14 am
The prime lending rate or the benchmark rate at which most prime customers of banks get their loan facilities approved— mostly for shorter tenors—touched a fresh low last week despite speculation that the prevailing lower rates environment would end towards the second quarter of this year.
According to the latest data available through last Friday, the average weighted prime lending rate (AWPLR) fell by 31 basis points (bps) to 5.59 percent, declining below the previous lowest of 5.66 percent as of December 11, 2020.
However, there is growing chorus by a section of economists and analysts that the current downturn in interest rates would end its run as early as June this year amid pressure on the rupee due to weak inflows by way of imports and outflows as foreign loan settlements.
First Capital Research last week went on to predict “potential” two policy rate hikes in 3Q and 4Q respectively.
However, the Monetary Board is of the view that interest rates, particularly the lending rates have more room to further decrease as the actions they took through 2020 to ease monetary policy via key policy rates cuts, cuts in statutory reserve ratio and bank rate and other reduced ceiling rates for administrated lending products, are yet to fully materialise.
With last week’s decline in the AWPLR, the benchmark rate has fallen by a total of 22 bps year-to-date, also falling by 415 bps from the beginning of 2020.
The excess liquidity of the overnight money market stood at Rs.116.49 billion by February 5, down from Rs.266.75 billion on January 1, 2021.
Meanwhile, the other lending rates in the economy too followed suit as the data, which is now available through December-end, showed the average weighted lending rate (AWLR) and the average weighted new lending rate (AWNLR) easing further.
During December alone, the two rates fell by 26 bps and 33 bps to 10.29 percent and 8.38 percent respectively.
During 2020, AWLR and the AWNLR have fallen by a full 330 bps and 442 bps, marking the steepest decline on record in lending rates in the history of the Sri Lankan economy.