COLOMBO: Sri Lanka's central bank on Tuesday kept key policy rates steady, but limited commercial banks' access to its repurchase or standing deposit facility to encourage them to lower lending rates.
The central bank kept the reverse repurchase or standing lending facility rate at 8.00 percent as expected.
But it also restricted commercial banks use of its standing deposit facility (SDF) to three times a calendar month at the current 6.50 percent.
"Any deposits exceeding three times by commercial banks will be accepted at a reduced interest rate of 5.00 percent per annum," the central bank said in a statement. For the remainder of September, banks can only use the standing deposit facility twice, it said.
The central bank said its moves aimed to encourage banks to lend to the "private sector at more reasonable interest rates, and thereby support the growth momentum of the economy, given the low inflation environment."
It said it took the decision after noting that commercial banks were depositing excess liquidity with the central bank at infrequent intervals, while private sector credit growth remained moderate despite lower inflation and interest rates.
"We see so much liquidity remaining in the system without being utilised for economic activity," Central Bank Governor Ajith Nivard Cabraal told Reuters.
"With this move we expect banks to lend at cheaper rates."
The policy rate is already at multi-year lows, while yields in T-bills are less than 6.3 percent. But commercial banks' leading rates are above 13 percent.
The central bank said inflation is now projected to remain comfortably at around 3-4 percent by end year, compared to the previously envisaged range of 4-5 percent due to the positive impact of a recent reduction in energy and fuel prices.
LOWER CREDIT GROWTH
Cabraal said the he is confident of Sri Lanka will achieve the 7.8 percent growth estimated for this year, and expected private sector credit growth to pick up.
The central bank said private sector credit growth for July "remained moderate", but did not give figures. Credit growth was 2 percent in June, its lowest since April 2010, down from 2.2 percent in May.
Some banks and economists say they have not seen much demand for borrowing for investment, as consumer spending is declining due to higher taxes and lower disposable income.
Analysts said a lack of transparency in government contracts was also hindering overall business sentiment.
In July, Treasury head P.B. Jayasundera had said that the slower credit growth was a consequence of private firms using their own surplus and earnings for investments.
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