Sri Lanka abandons interest rate controls and asks to raise deposit rates

ECONOMYNEXT – Sri Lanka’s central bank scrapped interest rate caps on bank overdrafts, credit card advances and gold-backed loans and also allowed deposit rates to rise after a hike in rates aimed at stemming the collapse of the rupee and runaway inflation.

“Licensed commercial banks should adjust deposit rates appropriately in line with strict monetary policy measures adopted by CBSL to attract deposits to the banking system,” Senior Deputy Governor TMYJP Fernando said in a direction to banks. .

The central bank raised the key rate at which money is printed to create external pressure and inflation to 14.50% from 7.50% as the rupee crashed from 203 to 330 per US dollar after two years of money printing.

In March, a cap of 20% was placed on credit card loans, 18% on temporary overdrafts and 12% on gold-backed loans (pledge).

Higher interest rates on credit card advances will apply from the next billing cycle. Credit card advances are interest free if paid when due.

Existing and renewed overdrafts and new pledge advances will be allowed to charge higher rates.

Central Bank Governor Nandalal Weerasinghe said on April 12 that he expected banks to stick to previously agreed rates in contracts, including Covid moratoriums until the end of their terms. Banks also benefited from term deposits.

Sri Lanka is now in the worst monetary crisis triggered by the central bank

Sri Lanka has a mid-term central bank that can manipulate interest rates through “flexible inflation targeting” by printing money and triggering monetary instability.

Analysts and economists have called for a single peg monetary authority (a currency board fully backed by reserves or a clean float regime without reserves) to prevent currency crises.

Sri Lanka has experienced three currency crises in quick succession over the past 7 years, pushing the rupee from 131 to 340 levels so far. (Colombo/Apr22/2022)

James V. Hayes