ECONOMYNEXT – Sri Lanka’s central bank may slap more price controls on bank lending rates if rates don’t fall as fast as expected in a direction to be issued on August 25, Central Bank Governor Nandalal Weerasinghe said.
The central bank was imposing price controls on banks because lending rates were not falling as fast as expected after lowering policy rates and lending rates, he said.
In the first set of controls, ceilings would be imposed on selected credit products.
Pawning facilities will have a ceiling of 18 percent, credit cards 28 percent, pre-arranged temporary overdrafts 23 percent and penal interest rates 2 percent.
By October November rates are expected to come down by 3 percent.
Sri Lanka’s interest rates were pushed up to stop possible hyper-inflation in 2022 after the central bank cut rates to target potential output (close an output gap) from 2020, blowing the balance of payments apart, running down reserves and triggering a sovereign default under a flexible inflation targeting framework with output gap targeting.
Market rates started to ease after the central bank lifted a surrender rule in March, allowing the rupee to strengthen and then buying dollars to generate liquidity from dollar conversions.
A confidence shock from the threat of domestic debt restructuring then kept rates elevated, with investors still buying bonds despite the threat of a default triggered by an IMF mandated gross financing need.
However limited re-structuring, engineered by authorities, helped restore confidence leading to a collapse of Treasuries yields.
Inflation is now close to zero, helped by negative private credit, an appreciating rupee and tighter monetary policy by the Fed.
Sri Lanka had inflation in line with developed nations until 1980 when the country started to run monetary policy with severe anchor conflicts worse than the Bretton Woods system, leading to double digit inflation and interest rates. (Colombo/Aug25/2023)