Steepest policy rate increase in the history of Sri Lanka

• Policy rates jacked up to 20 year highs
• Aggregate increase in policy rates stand at 900 basis points
• 5 year bond yield hits 20%
• Rupee dips

By Wealth Trust Securities

The Central Bank of Sri Lanka in a proactive move was seen increasing its monetary policy rates by a staggering 700 basis points (7.00%) at its announcement on Friday evening, the steepest increase in its history. 

The Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) were increased to 13.50% and 14.50% respectively, a level last seen in 2001. This follows two previous policy rate increases in January and March 2022 of 50 basis points and 100 basis points respectively. The aggregate increase in policy rates including its August 2021 of 50 basis points stands at 900 basis points (9.00%) at present from its low of 4.50% and 5.50% in July 2021.

At the Treasury bond auctions conducted on Friday, the yield on the five year bond was seen touching 20.00% for the first time since 2008-2009 as its weighted average on the maturity of 15.12.2027 was recorded at 20.21%. However, only Rs. 13.12 billion was raised against an offered amount of 20 billion while all bids for the three year maturity of 15.03.2025 were rejected where Rs. 25 billion was on offer. 

The activity levels in the secondary bond market remained subdued during the week ending 08 April with limited trades seen only on the 01.08.2024 maturity within the range of 18.40% to 18.50% and against its previous weeks closing level of 15.00/50. Two way quotes along the rest of the yield curve increased as well, resulting in an upwards shift of the overall yield curve.

At the weekly Treasury bill auction, weighted average rates increased for a sixth consecutive week with the 182 day and 364 day bills increasing by 311 and 341 basis points respectively to 15.36% and 15.69%, recording the highest week on week increase in over 25 years while the 91 day bill increased by 120 basis points to 14.12%. An amount of Rs. 72.88 billion was accepted in total against a total offered amount of Rs. 80.00 billion.

The daily secondary market Treasury bond/bill transacted volumes for the first four trading days of the week averaged Rs. 13.39 billion. The foreign holding in rupee bonds remained mostly unchanged at Rs. 2.65 billion for the week ending 06 April. 

In money markets, the weighted average rates on call money and repo remained steady at 7.49% and 7.50% respectively for the week as a volume exceeding Rs. 600 billion was withdrawn on a daily basis during the week from Central Banks SLFR (Standard Lending Facility Rate) of 7.50%.

The total outstanding liquidity deficit decreased during the week to Rs. 660.47 billion by the end of the week against its previous weeks of Rs. 718.63 billion.

The Domestic Operations Department (DOD) of Central Bank was seen injecting liquidity by way of five day reverse repo auction at a weighted average rate of 7.50%.

The CBSL’s holding of Gov. Securities was registered at Rs. 1,849.70 billion against its previous weeks of Rs. 1,730.43 billion.

Forex Market 

In Forex markets, the USD/LKR rate on spot contracts dipped during the week to trade from a weekly high of Rs. 310.00 to a low of Rs. 326.00 while activity levels remained muted.

The daily USD/LKR average traded volume for the four trading days of the week stood at $ 15.79 million.  

(References: Central Bank of Sri Lanka, Bloomberg E-Bond trading platform, Money broking companies)