Central Bank cuts SDFR & SLFR by 100 bps to induce further reduction in lending rates

Jul 09, 2020 (LBO) – The Monetary Board of the Central Bank has decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points each, to 4.50 percent and 5.50 percent, respectively.

The Central Bank said the Board arrived at this decision with a view to inducing a further reduction in market lending rates, thereby encouraging the financial system to aggressively enhance lending to productive sectors of the economy, which would reinforce support to COVID-19 hit businesses as well as to the broader economy, given conditions of subdued inflation.

“The Monetary Board wishes to strongly reiterate that all financial institutions led by licensed commercial banks (LCBs) must pass on the full benefit of the cumulative reduction of 250 basis points in policy interest rates thus far during the year without delay,” the Central Bank said.

LCBs are also expected to release to the private sector borrowers the enhanced levels of liquidity effected by the reduction of the Statutory Reserve Ratio (SRR) by 300 basis points thus far during the year, which has also reduced the cost of funds of banks.

“Such additional liquidity must be used to lend to productive sectors of the economy, along with concessionary credit schemes already announced by the Central Bank to help needy sectors of the economy.”

According to the Central Bank, a further space remains for market lending rates to adjust downwards comparable with the series of easing measures taken by them thus far during the year.

Despite high levels of surplus liquidity available to banks, credit extended to the private sector contracted significantly in May 2020.

“However, credit extended to the private sector is likely to pick up in the period ahead, supported by the expected sharp reduction in lending rates and highly concessional credit schemes introduced to support COVID-19 hit businesses,” the Central Bank said.

“Meanwhile, the notable increase in credit to the public sector drove the increase in domestic credit as well as the overall monetary expansion during the first five months of 2020.”