CB threatens lending rate cap on specific institutions | Daily News


If lending institutions fail to comply with rate cap

CB threatens lending rate cap on specific institutions

Governor, Central Bank of Sri Lanka, Dr. Indrajit Coomaraswamy yesterday said the Monetary Board was contemplating imposing lending rate caps on specific institutions, if they fail to comply with the Central Bank directions to slash interest rates.

Dr. Coomaraswamy was addressing the media on the bank’s Monetary Policy stance last week.

The Monetary Board reduced the policy interest rates - the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) - by 50 basis points to 7 percent and 8 percent yesterday.

The monetary policy announcement noted, ‘The Central Bank will continue to closely monitor the developments in market lending rates and impose caps on market lending rates of financial institutions if the intended reduction is not realized within specified timelines.’

Dr. Coomaraswamy reiterated the note on lending caps and said “The monetary board took the decision to monitor closely, very closely, what is happening to market lending rates and if necessary they would impose an appropriate cap on market lending rates of individual institutions. If the intended reduction in market lending rates is not realized in the specific timelines, the Central Bank will work with the stakeholders to determine the timeline and the measures that would be taken. There has to be a more material impact on lending rates. The monetary board is determined.”

He later added “Any lending rate caps are distortionary. It is not what one wants to do.”

Dr. Coomaraswamy said the monetary board felt that a reduction in rates was called for. He said “There has been a continuation of a dovish monetary policy stance amongst the major central banks. We have also seen a number of key emerging market countries reduce their rates. We continue to have an output gap. Our potential growth rate is 5 percent. Our current projection for growth in 2019 is 3.1 percent. Output gap stabilization is an important determinant of our being flexible inflation targeting regime.”

The governor and Director of Economic Research, Dr. Y M Indraratna called for concern regarding the contraction in private credit growth. Indraratna said “Private sector credit in absolute terms, declined marginally by Rs. 1.2 bn in July 2019 after a significant increase of Rs. 63.2 bn in June 2019. Year-on-year growth of credit further moderated to 7.7 percent in July 2019 in comparison to 8.7 percent in June 2019, the lowest growth rate witnessed since December 2014.”Dr. Coomaraswamy cited positive developments in the trade account. He said “the rupee has appreciated. “There were some foreign parties pulling funds from the Rs. denominated government securities market. He said that he was unconcerned as total foreign investment amounted to USD 700 million and reserves were USD 8.4 billion.

The CBSL aims for USD 6.5 billion, representing 3 months imports, in reserves at any given moment.”

He cited the difficulties to businesses due to high real rates.

He said “This is why we are determined to guide downward lending rates.

There is this structural problem that is choking the economy, choking economic activity.

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