Sri Lanka Restricts 6.5% Deposit Rate to Boost Lending

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Sri Lanka on Tuesday unveiled tough new restrictions on deposits as it looks to encourage commercial banks to boost lending and help sustain the country’s healthy economic growth.

The Central Bank of Sri Lanka’s monetary board said after its monthly review it would keep its key repurchase rate at 6.5 percent to lenders, but slashed it to 5.0 percent for any more than three deposits a month.

“The measure would actively encourage commercial banks to utilise the substantial amounts of excess liquidity to enhance the flow of bank credit to the private sector at more (competitive and) reasonable interest rates,” it said in a statement.

The central bank retained its own lending rate to commercial banks at 8.0 percent, which has remained unchanged since a cut in January.

Authorities have said there is “adequate space” for banks to lower their lending rates, which are running at more than 9.0 percent at some institutions while credit card interest is at 24.0 percent.

The board said on Tuesday the economy was growing strongly, with robust performance in the industrial sector, but noted that credit to the private sector was modest.

“The Monetary Board has been of the view that such liquidity must ideally be utilised for productive economic activities instead of remaining unutilised for a considerable length of time in the system,” it said.

It also said prices were stable in August and revised down its inflation forecast for the whole of 2014 to between 3.0-4.0 percent, from its earlier estimate of 4.0-5.0 percent.

The economy grew 7.7 percent in the first half of this year and was on track to achieve a target of 7.8 percent for the calendar 2014 year, the board said.

Sri Lanka’s economy recorded 8.0 percent-plus growth for two straight years after troops crushed separatist Tamil Tiger rebels in 2009, but the pace has slowed in the last two years.

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