Short-term lending rates drop sharply extending weeks-long declines

• AWPR fell by a sharp 226 basis points last week to 25.28%
• CB last week said rates have room to ease before they cut policy rates
• Sees further room for easing in line with improved liquidity and sentiments
• Observes some moderation in deposit rates 

Sri Lanka’s benchmark short-term lending rate fell sharply last week after the Central Bank said the rates have more room to ease before it cuts policy rates to reverse its nearly one and half-year long tightening stance. 
The average weighted prime lending rate (AWPR) fell by a sharp 226 basis points last week to 25.28 percent.
This is the third week in a row that the benchmark short-term lending rate fell after shedding 14 and 39 basis points in the previous two weeks, respectively.

Some foreign banks in particular were seen offering loans at rates as low as 20.71 last week as they operate with relatively better liquidity than most of their local peers.
Prime rate is the rate at which banks price their very short-term loans to their most prime customers with very high credit quality. 

Sri Lanka’s interbank money market which has long been in a massive deficit saw returning to brief surpluses since the Central Bank on January 03 announced limits on commercial bank’s access to their standing facility windows in a bid to reactivate that market.
The much lower prime rates by some foreign banks could be the result of them granting loans to their high quality borrowers at rates above the standing deposit rate which is currently at 14.5 percent after the restrictions which came in. 

The restrictions that came into effect from January 16 prevented commercial banks from parking their excess liquidity under the Standing Deposit Facility window for more than five times a month. 
This was done to encourage trading between banks. Banks which are in need of short-term liquidity now need to borrow from other banks without relying every time on the standing facility windows.
Last week, the interbank market ended with a surplus of Rs.144.26 billion after banks deposited Rs.296.24 billion under the standing deposit window. 

This is because they wait till Friday to park their excess liquidity with the Central Bank due to the 5-time restrictions a month as it will allow them to earn interest for 3 days. 
The liquidity also improved in the overnight market due to overnight injections by the Central Bank via reverse repos in January. 

“Early signs of a gradual easing of excessive market interest rates have been observed recently in response to the administrative measures adopted by the Central Bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets,” the Monetary Board said last week in their policy statement. 
The Central Bank sees further space for the market rates to ease in the period ahead in line with the improvements in domestic market conditions and sentiments, along with the moderation in the government securities yields.