Central Bank eases key rates to support ailing economy amidst COVID-19 Pandemic spread

Central Bank eases key rates to support ailing economy amidst COVID-19 Pandemic spread

Central Bank eases key rates to support ailing economy amidst COVID-19 Pandemic spread

Written by Chathuranga Hapuarachchi

16 Mar, 2020 | 3:32 pm

Colombo (News 1st):- The Central Bank on Monday surprisingly cut the key policy rates by 25 basis points with effect from 17 March and the Statutory Reserve Ratio (SRR) on all rupee deposit liabilities of licensed commercial banks (LCBs) by 100 basis points to support economic activity with the rapid global spread of the COVID-19 pandemic and its possible further spread in Sri Lanka.

The central bank issuing a statement said that the Monetary Board of the Central Bank of Sri Lanka, at an urgent meeting to review its monetary policy stance on 16 March 2020, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 25 basis points to 6.25 percent and 7.25 percent, respectively, with effect from 17 March 2020 and to reduce the Statutory Reserve Ratio (SRR) on all rupee deposit liabilities of licensed commercial banks (LCBs) by 1.00 percentage point to 4.00 percent, with effect from the current reserve maintenance period.

“The Board arrived at this decision in consideration of the urgent need to support economic activity with the rapid global spread of the COVID-19 pandemic and its possible further spread in Sri Lanka,” the bank said in a statement.

The surprise rate cut comes after the monitory authority slashed the key rates by 50 basis points in January to support the already ailing economy.

Central Bank Governor Professor W. D. Lakshman earlier said that that they expect the country to record a growth of between 3.5 and 4% in 2020.

Economists expect Sri Lanka’s economic growth to slump to a near two-decade low in 2019.

The full text of the central bank’s statement is as follows:

The Central Bank of Sri Lanka Eases Monetary Policy Further to Support Economic Activity amidst the Spread of the COVID-19 Pandemic.

The Monetary Board of the Central Bank of Sri Lanka, at an urgent meeting, to review
its monetary policy stance on 16 March 2020, decided to reduce the Standing Deposit
Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank
by 25 basis points to 6.25 percent and 7.25 percent, respectively, with effect from 17 March
2020 and to reduce the Statutory Reserve Ratio (SRR) on all rupee deposit liabilities of
licensed commercial banks (LCBs) by 1.00 percentage point to 4.00 percent, with effect
from the current reserve maintenance period. The Board arrived at this decision in
consideration of the urgent need to support economic activity with the rapid global spread
of the COVID-19 pandemic and its possible further spread in Sri Lanka.

Sri Lanka’s economic growth, which has remained subdued for an extended period
of time until end 2019, has begun to turnaround as a result of fiscal and monetary stimulus
and the return of business confidence after the presidential election. However, it has
increasingly become evident that domestic economic activity during the year 2020 would
continue to be affected through various channels by the spread of the pandemic.

Prior to today’s decision, the Central Bank, during the year thus far, has taken a
number of measures to support the revival of domestic economic activity, in the context of
well-anchored inflation expectations and the absence of demand-driven pressures on
inflation. These include the reduction of policy interest rates of the Central Bank by 50 basis
points effective 30 January 2020, facilitating the implementation of the credit support
package for borrowers in both performing and non-performing categories and the
implementation of a credit guarantee scheme to revive non-performing advances, while
maintaining the dialogue with the financial market to ensure market lending rates continue
to decline in line with the Monetary Law Act Order No. 02 of 2019. The Central Bank also
assured the financial market of the provision of liquidity as necessary to counter any impact
arising from the evolving situation. Today’s decision will complement the above measures
that are already in place.

The Central Bank reemphasizes the need for all financial institutions led by licensed
commercial banks to ensure the full benefit of the cumulative reduction of 75 basis points
in policy interest rates thus far during the year as well as the reduced cost of funds through
the reduction in SRR is reflected in market lending rates without further delay. In addition,
the Central Bank requests financial institutions to refrain from engaging in speculative
activity which could lead to panic in the financial market.

The Central Bank has put in place well-tested business continuity arrangements,
which will be triggered as and when required to prevent any disruption to cash and electronic
transactions and ensure the timely settlement of liabilities of the government and the Central
Bank.

The Central Bank is working closely with the government to ensure coordinated fiscal
and monetary policy responses to mitigate the economic impact of the COVID-19
pandemic. In particular, the Central Bank will work with the government to raise the
required funding for the government smoothly to tackle the current exceptional situation.

The Central Bank will closely monitor global and domestic market developments and
take further policy, regulatory and operational actions as necessary, while monitoring
activities of each financial institution to ensure smooth functioning of the financial market
and the transmission of the Central Bank action to the economy in order to ensure that those
who are in need of urgent support receive the required timely assistance.

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