Prime lending rate falls below Central Bank’s October target

The prime lending rate, the rate at which banks lend to their prime customers, dropped earlier this month to a level even below Central Bank’s target by the end of October. 
The Average Weighted Prime Rate fell by 17 basis points, settling at 13.14 percent, below Central Bank’s intended 13.5 percent by October end. 
As a key indicator, the prime rate influences other lending rates, from small business loans to mortgages, reacting closely to changes in government securities yields due to monetary policy shifts. A year ago, the prime rate surged to 28.61 percent when the Central Bank raised key rates by up to 800 basis points to counter rampant inflation.  This tightening adversely impacted households, leading to poverty, hunger, reduced consumption, and the collapse of many small and medium-sized businesses.

As of September, the average weighted new lending rate decreased to 16.57 percent from 17.89 percent in August and 24.93 percent a year ago. 
The decline in rates is a welcome relief for small businesses that faced restricted access to funds during the economic downturn starting in March last year.
While banks have shown some willingness to resume lending after almost two years, a cautious approach persists due to the fragile economic recovery and existing uncertainties, as reflected in recent bank earnings reports. 

The 8th monetary policy review is scheduled for this Friday (November 24), with the Central Bank having cut policy rates thrice by a total of 550 basis points to 10.00 and 11.00 percent. 
Administrative measures have also been implemented to lower lending rates and facilitate credit flow.
With Sri Lanka anticipating modest economic growth next year after two consecutive contractions, the low rates are expected to boost the economy by directing credit towards both investments and consumption, though concerns about higher taxes linger.