Borrowers see little relief as lending rates remain elevated

The prime lending rate eased marginally in the week ended June 26, marking the first decline since the Central Bank’s surprise interest rate hike last month. 

However, the borrowing costs remained close to their highest levels in two years, as the banks continued to price in inflation and currency risks. This could pose as a growing challenge for the businesses seeking to finance expansion and investment.

The Weekly Average Weighted Prime Lending Rate (AWPR), a benchmark for lending to the most creditworthy corporate borrowers, fell by three basis points to 10.39 percent, from 10.42 percent a week earlier, according to the Central Bank’s Weekly Economic Indicators report.

The decline follows a sharp increase in the lending rates after the Central Bank raised its Overnight Policy Rate by 100 basis points to 8.75 percent in May, its first tightening move in nearly three years.

Despite the modest pullback, the AWPR remains 228 basis points above 8.11 percent recorded a year ago.

The liquidity conditions improved markedly with the total outstanding market liquidity widening to a surplus of Rs.61.62 billion by June 26, from Rs.31.25 billion a week earlier. The Average Weighted Call Money Rate remained unchanged at 9.22 percent.

However, the broader monetary indicators suggest the demand for credit remains robust despite the higher interest rates.

The private sector credit expanded 29.1 percent year-on-year in April, remaining close to multi-year highs and indicating that the impact of tighter monetary policy has yet to meaningfully slow the borrowing activity. Credit to the private sector reached Rs.16.66 trillion by April, compared with Rs.14.93 trillion a year earlier.

The persistence of strong credit growth could complicate the Central Bank’s efforts to contain inflationary pressures. The National Consumer Price Index inflation accelerated to 5.4 percent in May, from 4.7 percent a month earlier, while core inflation edged up to 4.5 percent.

Meanwhile, the treasury bill yields remained around the 10 percent mark during the week. The benchmark 364-day treasury bill yield stood at 10.17 percent, compared with 7.94 percent a year ago.