CB flags off high inflation rate- lending rate differential to banks

Monday, 10 June 2013 00:56 -     - {{hitsCtrl.values.hits}}

  • Average differential in rest of Asia is 3-5% whereas in Sri Lanka it is 8% says Governor, indicating banks will have to fall in line

The Central Bank on Friday flagged off what it described as the high differential between the country’s inflation rate and lending rates, indicating that commercial banks would be required to fall in line lower difference as seen in rest of Asia.

“Lending rates have more room to come down,” Central Bank Governor Nivard Cabraal told the ceremonial launch of 2012 Annual Report of the Finance and Planning Ministry officiated by President Mahinda Rajapaksa.

He said that for four consecutive years Sri Lanka has succeeded to maintain inflation rate at single digit level (around 8%) and despite revision in policy rates in recent months banking industry’s lending rates (around 16%) haven’t adjusted downward to a level desired.

“In Asian countries with which Sri Lankan firms compete, the differential between inflation and interest rate is between 3 and 5% whereas in Sri Lanka it is at a high 8%. Lending rates have to be lower for the benefit of Sri Lankan firms, to generate fresh round of investments and sustain the progressive development that the country has seen since the end of the conflict,” Cabraal said.

“We will request the banking industry to revisit their lending rates and come on par with regional economies,” the CB Chief added.

In assessing the differential, the Central Bank had tracked countries such as Vietnam, Malaysia, Philippines, Thailand, Indonesia, Singapore, Korea, India and China.

Analysts noted that a 3 to 5% reduction in lending rates would give a major boost to private sector borrowing as well as stimulate the economy. However, the IMF has cautioned against an easing of monetary policy as it could lead to an overheating of the economy.