Central bank cuts Sri Lanka 3-month deposit rate 1.7-pct under new price controls
Friday June 28, 2019 17:00:00
ECONOMYNEXT- Sri Lanka’s central bank on Friday ordered a cut of 1.71 percent on 3-month deposits under its controversial price control program to stop depositors from getting a market based interest rate.
The central bank said maximum rates banks should pay for savings deposits is 7.0 percent for the September quarter, down from 7.5 in the June quarter.
The rate for 3-month deposits is 8.33 percent, sharply down from 10.04 percent in the previous quarter.
This is based on the reference rate of 8.83 percent of the weighted average yield rate of 12-month Treasury bills, down from 10.54 percent previously.
The one year fixed deposit rate has been controlled at 9.83 percent, down from 11.54 percent in the previous quarter.
Sri Lanka’s rupee collapsed from 153 to 182 through 2018 as the central bank printed money to control market interest rates with printed money, destroying real incomes and savings of the people, and putting foreign investors, in bonds – who did not face exchange controls – into flight.
The deposit rates are being cut as the altered price structure of the country from depreciation is gradually feeding into the broader economy after liquidity shortages ended.
At non-bank financial companies, the interest rate for savings is now 7.5 percent and for 1-year fixed deposits, it is 11.08 percent.
Banks and finance companies may offer 50 basis points more for children’s and senior citizen’s savings accounts.
In April the central bank linked savings deposit rates to to the lower end of the policy rate and fixed deposits to the twelve month Treasury Bill average weighted yields rate.
The new price controls were brought at end-April. It not clear whether banks actively colluded with the move and regulatory capture is involved.
However depositors will effectively subsidize banks which have seen a spike in bad loans after currency collapse and monetary instability that came from the attempt to control policy rates and exchange rates at the same time.
Former Central Bank Deputy Governor W. A. Wijewardena, a classical style economist, expressed sadness at the move.
"An unwise policy; what’s to be done is to take measures to narrow interest margins which stand at around 4-6% now," Wijewardena said in a twitter.com message.
"Forcing banks to cut deposit rates w/out curtailing lending rates will widen the margins¬ help reduce lending rates which CB wants them to do; poor depositors."
The central bank however cut the reserve ratio, which worsens inefficiency and widens margins, in the one good outcome during the 2018 currency crisis.
At the start of June Central Bank Governor Indrajit Coomaraswamy said that lending rates were falling slower than expected, and warned that he may also bring controls to lending rates.
According to classical economists when the state makes one interventions, it is not unusual to bring two other controls in an attempt to mitigate its fallout.
The current administration economic policy framework has been characterized by monetary instability and price controls from the first quarter of 2015. (Colombo/June28/2019- Jul03 9:05am corrected 3-month deposit rate)