By Uditha Jayasinghe and Swati Bhat
COLOMBO, November 24 (Reuters) – Sri Lanka’s central bank on Thursday threatened administrative intervention to control high market interest rates that it saw as not in line with its policy rates and declining inflation prospects.
Any such action, interpreted by economists as a push to the downside, would cut high deposit rates and borrowing costs for businesses – and eventually, as depositors looked for alternatives, for the crisis-hit country’s government.
The Central Bank of Sri Lanka (CBSL) also confirmed its expected decision to keep its two official rates stable, citing the need to curb demand in the economy. The permanent loan facility LKSLFR=ECI was maintained at 15.50% and the Standing Deposit Facility Rate LKSDFR=ECI at 14.50%.
“The board noted with concern the abnormal increase in market interest rates, especially deposit interest rates and short-term lending interest rates…” the CBSL said in a statement. announced his political decision.
“If an adequate downward adjustment of market interest rates does not take place in line with the expected disinflationary path, the central bank will be forced to impose administrative measures to prevent any undue movements in market interest rates,” he said.
In a subsequent press conference, CBSL Governor P. Nandalal Weerasinghe said challenges in government financing could be “handled with interest rates,” indicating that the central bank also wanted lower yields on government debt.
Market rates on government bonds and treasury bills are about double the official rates for overnight money.
Businesses are also suffering as lending rates are well above levels available before the country entered a severe economic crisis in March.
“The central bank has previously imposed limits and may do the same again, but would prefer to let markets adjust and respond to the situation,” Weerasinghe said. “Yeah, long-term rates are down and that’s good.”
FEAR OF THE HAIRCUT
Interest rates on government bonds are high in part because creditors fear that debt restructuring will result in a haircut – partial cancellation of obligations.
“The government has also been borrowing long-term at rates over 30%, which could raise the question of a possible haircut being factored into the decision,” said Nikita Tissera, vice president, business consulting, at NDB Investment bank.
“The decision to keep rates on hold is also a way of signaling an intention to lower rates in the future.”
Sri Lanka is talking to creditors about a needed debt restructuring before receiving a much-needed $2.9 billion bailout from the International Monetary Fund.
“We are confident that the way the discussions are going we will get reassurances (from creditors) soon,” Weerasinghe said. “IMF board meetings are held every week, so if we miss December it’s no big deal. We can go to the IMF board in January.”
The island nation has struggled with rising inflation, driven in part by a shortage of foreign exchange that has limited the supply of imports and undermined the currency. In response, the CBSL raised policy rates by a record 950 basis points this year.
The central bank’s statement “is clear that CBSL wants market interest rates to be on a downward path in the coming months, particularly citing inflation moderation,” said Thilina Panduwawala, head of research at Frontier. Research.
The national consumer price index was 70.6% higher in October than a year earlier. But the CBSL expects contained, if sustained, fiscal policy and its tightening monetary policy will reduce the annual inflation rate from 4% to 5% by the end of 2023.
Economic activity will recover gradually but sustainably, supported by projected improvements in supply conditions, improved market confidence and the effect of measures to stabilize economic conditions, the CBSL said in its statement.
(Reporting by Swati Bhat and Uditha Jayasinghe; Editing by Muralikumar Anantharaman and Bradley Perrett)
((firstname.lastname@example.org; twitter.com/swatibhat22; +91-22-68414381; Reuters Messaging: email@example.com))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.