CB forecasts surge in credit demand by year’s end; more meaningful recovery by 1Q24

The Central Bank expects the demand for credit to grow by the end of this year with the seasonal demand and a more meaningful recovery in private credit by the first quarter of next year, backed by further decline in market interest rates in tandem with policy rate cuts.

After a full year of de-growth, private credit staged a recovery in June 2023, but the momentum was not maintained in the following months as the borrowers appear to have adopted a wait-and-see approach, anticipating further reduction in interest rates.

“We have already seen a small recovery. I think most probably the recovery is slower when people are expecting the interest rates to come down further. There, the tendency is not to get the new credit, but still trying to reprice their obligations and bring down the financing cost. That is what’s happening right now,” Central Bank Governor Dr. Nandalal Weerasinghe told the post-monetary policy presser held last week.

“But, once the interest rates are settled at a certain level and also economic activity pickup, then we are going to see people going to start increased investments, more consumption. With that the credit flow will turnaround,” he added.
“Even in the last quarter of this year, we probably will see seasonal demand towards November-December. We can definitely expect further expansion in credit in the first quarter of next year,” he further said.

The Monetary Policy Board of the Central Bank last week further reduced the key rates by 100 basis points as they now look to stimulate economic activity after bringing the galloping inflation, which almost hit 70 percent in September last year, under control.
With last week’s rate cut, the Central Bank has had reduced policy rates by 550 basis points cumulatively since June.

Sri Lanka’s economy recorded a contraction in economic growth to 3.1 percent in the second quarter, and the Central Bank expects the economy to record a positive growth on a quarterly basis in the second half of the year. 
As per the latest Central Bank data, credit to the private sector in absolute terms has expanded by about Rs.5 billion in August to Rs.7, 098 billion from a month ago. However, on a year-on-year basis, credit to the private sector contracted by 6.8 percent in August.

At the last week’s press conference, the Central Bank also indicated its tilt towards further rate cuts. “When the inflation target is at 5 percent and the policy rates at 11 percent, there is still space for interest rates to go down further. But we will be closely monitoring the inflation path before any rate action,” Dr. Weerasinghe said.