CB doubles down on rate cuts to counter COVID-19 impact

• Proactively announces fourth rate cut 
• Policy rates reduced by 50 basis points, 150 points so far for year
• Warns banks of regulatory action unless interest rates decline in line with CB decisions 
• Says changes will be made as and when market requires  

In yet another effort to counter the impact of COVID-19 on the economy, the Central Bank yesterday adjusted policy rates for the fourth time this year, reducing rates by 50 basis points, and warned banks it will resort to punitive measures unless interest rates were adjusted to mirror Monetary Board decisions. 

The Monetary Board of the Central Bank of Sri Lanka, at a special meeting held yesterday, reviewed the current monetary policy stance and decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 5.50% and 6.50%, respectively. 

The decision is effective from the close of business on 6 May 2020, the Central Bank said in a statement.  

“The Board arrived at this decision considering the necessity to further support the economy to weather the adverse economic impact caused by the COVID-19 pandemic, given subdued inflationary pressures.”  

With this decision, policy interest rates of the Central Bank have been reduced by 150 basis points thus far in 2020, in addition to the other measures taken to ease monetary conditions in the market.

The Monetary Board noted, with disappointment, that market lending rates have not declined in line with the series of measures taken to ease monetary policy and monetary conditions thus far during the year. 

“Therefore, financial institutions are urged to reduce lending rates without further delay, failing which, the Central Bank will be compelled to take appropriate regulatory action to bring down market lending rates.”

The Central Bank also said there will be no monetary policy announcement on 21 May as previously scheduled. However, the Monetary Board may review the monetary policy stance of the Central Bank and make necessary changes as and when required in consideration of economic and market developments.

In January, the Central Bank reduced policy rates by 50 basis points hoping to kick start a sluggish economy supported by a stimulus package announced by the new Government in December. However, in little over a month Sri Lanka was caught up in the global COVID-19 pandemic and the Central Bank reacted by proactively slashing policy rates by 25 basis points each in both March and April. It has once again announced a rate cut about three weeks before the set date for announcement.    

Members of the Monetary Board will be hoping the latest round of policy easing will motivate the private sector with cheaper credit to be more bullish and boost consumption for an economic recovery in the second half of the year. However, lower interest rates will have limited impact on boosting investment and exports without virus outbreak control in Sri Lanka and a wider global recovery.