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Some Sri Lanka banks up fixed deposit rates

ECONOMYNEXT – Some Sri Lanka banks have raised rates for 12 – month term deposits, which could be an early sign that credit demand may be recovering, and the economy has made a so-called ‘soft landing’, analysts say, though there has also been a spike in Treasuries yields.

In mid-March publicly traded Sampath Bank raised its 12-month fixed term deposit rate advertised online to 11.5 percent from 10.5 percent.

DFCC Bank later followed suit, raising its 12-month FD rate 50 basis points to 11.5 percent.

The larger private banks such as HNB and Commercial Banks are still offering 10.5 percent levels and state banks around 10.5 to 10.75 percent, analysts said. Most banks cut rates in the second half of 2017.

Most banks will give slightly higher ‘negotiated rates’ for large deposits.

Sri Lanka’s Treasuries yields also spiked in February following an electoral defeat by the ruling coalition in local council polls, which led to a weakening of confidence, that could be temporary, analysts say.

However the political uncertainty has cast doubts on future economic reforms especially market pricing energy, which can affect credit demand of state enterprises from banking system.

Sri Lanka’s central bank has not cut policy rates, but the effective benchmark overnight rate has fallen from the 8.75 percent ceiling rate to around 7.50 to 7.60 percent, closer to the floor 7.25 percent.

The central bank has been sterilizing dollar purchases at around 7.35 to 7.50 percent for up to two week repos, effectively setting a short term policy rate, which indicates a ‘rate cut’ of about 120-130 basis points since the end of the balance of payments crisis in mid-2017.

In Sri Lanka the central bank usually tries to stop interest rates going up when credit demand goes up by printing money, generating a BOP crisis, which is corrected with a steep rate rise and a currency collapse.





The spike in rates and an overall slowdown as inflation picks up sharply, can lead to absolute de-leveraging.

However in the last six months, private credit has been a positive 50 to 60 billion rupees a month, while outstanding credit to central government fell absolutely to 2,168 billion rupees in December from a peak of 2,254 billion in July.

Credit to state enterprises has started to go up since October and rose 31 billion rupees in December to 514.3 billion rupees, but is still below the May peak of 561 billion rupees giving space for private credit to maintain volumes.

The central bank however has been mopping up liquidity and building foreign reserves, tightening the credit system, though rates fell amid absolute contractions in state credit.A steady mopping up in liquidity by the central bank shows that banks are buying assets from the CB with only the balance flowing back into the economy as credit leading to the building up of forex reserves.

Meanwhile the negative effects of a drought in 2016 and 2017 are also waning.

The rise in deposit rates of private banks could also be due to a knock-on effect of gilt rates, which could be due to a temporary confidence effect or higher borrowings.

But analysts say it could also be a sign that credit demand is steady or strengthening with an overall economic recovery underway.

Sri Lanka presented a confidence building reform oriented budget for 2018, after two years of bad budgets, though some concerns are rising that President Maithripala Sirisena could undermine policies aimed at giving economic freedoms to the poor.(Colombo/Mar12/2018)


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