Sri Lanka policy rates unchanged, banks urged to narrow spreads

June 18, 2014 (LBO) – Sri Lanka’s central bank held policy interest rates at 6.5 and 8.0 percent but urged banks to narrow spreads by cutting lending rates, as credit growth continued to be slow. Deputy Governor Nandalal Weerasinghe said Tuesday such market developments would help bring down interest rates to levels in line with deposit rates.

Some firms who had overleveraged themselves during the bubble years up to 2011 were also trying to sell assets and strengthen their balance sheets, analysts say, which takes time.

However following the de-leveraging process such firms would emerge stronger for an expansion phase.

The Central Bank said firms were also borrowing abroad and going to securities markets where rates have fallen.

The Central Bank said it was “of the firm view that the banks now have adequate space to reduce market lending rates further” to boost credit demand, as deposit rates have fallen over the past few months.

“Accordingly, the Monetary Board also decided to urge banks to lower their market lending rates in order to reflect these changing circumstances.”

In April private sector credit grew 3.3 percent from a year earlier, the monetary authority