By Indika Sakalasooriya
Pensioners, who depend on interest income from their bank deposits for their daily expenses, are likely to be hit by the newest interest rate cut announced by the Central Bank, analysts and economists point out.
According to them, the interest rate cut announced by the Central Bank last Friday would prompt commercial banks to immediately cut deposit rates.
“This decision by Central Bank to lower the reverse repurchase rate by half a percentage point to 9 percent would certainly compel the banks to reduce both deposit and lending rates — which we will be able to see during this week,” an analyst, who requested anonymity, said.
Pensioners, who depend on interest income from their bank deposits for their daily expenses, are likely to be hit by the newest interest rate cut announced by the Central Bank, analysts and economists point out.
According to them, the interest rate cut announced by the Central Bank last Friday would prompt commercial banks to immediately cut deposit rates.
“This decision by Central Bank to lower the reverse repurchase rate by half a percentage point to 9 percent would certainly compel the banks to reduce both deposit and lending rates — which we will be able to see during this week,” an analyst, who requested anonymity, said.
Currently, the average deposit rates are between four to five percent and lending rates range from 12 to 15 percent.
He said he was doubtful whether whether the new rate cut would spur a credit growth as there was “hardly any demand for credit, apart possibly from the construction sector in anticipation of a tourism boom”.
“On the other hand, the deposit rates will further fall and as a result the interest income will follow suit. This could be a quite a challenge for a country where there’s a lot of pensioners and an increasingly aging population.
He said he was doubtful whether whether the new rate cut would spur a credit growth as there was “hardly any demand for credit, apart possibly from the construction sector in anticipation of a tourism boom”.
“On the other hand, the deposit rates will further fall and as a result the interest income will follow suit. This could be a quite a challenge for a country where there’s a lot of pensioners and an increasingly aging population.
According to recent Labour Ministry data, the percentage of people above the age group of 60 years increased from 6.3% in 1971 to 9.2% in 2001 and was estimated by the United Nations at 11% in 2008. By 2031, 21.9% of the people will be over 60 years, or one out of four will be an aged citizen.
Meanwhile, in its statement announcing the rate cut, the Central Bank has reasoned out why the bank opted for it as “The Central Bank expects credit flows to the private sector to gather momentum during the remaining months of the year alongside the anticipated pick-up in economic activity”.
Meanwhile, in its statement announcing the rate cut, the Central Bank has reasoned out why the bank opted for it as “The Central Bank expects credit flows to the private sector to gather momentum during the remaining months of the year alongside the anticipated pick-up in economic activity”.
However, a reputed senior economist, who also wished to remain unnamed, said that this measure by the Central Bank communicates that it is trying to accelerate economic growth at any cost.
“The bank’s presumption that the country’s inability to attain a higher growth is due to lack of cheaper credit would have prompted it to do so. But the economic growth is a complex issue and adequate credit flows are necessary but not sufficient for generating growth. We need an investment friendly atmosphere for people to take risk and invest. The prerequisites like a flexible labour market, good infrastructure, improved road transportation and energy and power at competitive prices are all needed for credit to work in an economy. Hence, this move may simply lead to higher credit expansion and future inflation”.
“The bank’s presumption that the country’s inability to attain a higher growth is due to lack of cheaper credit would have prompted it to do so. But the economic growth is a complex issue and adequate credit flows are necessary but not sufficient for generating growth. We need an investment friendly atmosphere for people to take risk and invest. The prerequisites like a flexible labour market, good infrastructure, improved road transportation and energy and power at competitive prices are all needed for credit to work in an economy. Hence, this move may simply lead to higher credit expansion and future inflation”.
Since 2009 the Central Bank of Sri Lanka quite opposed to the other central banks in the region, has been lowering interest rates to push economic growth whereas others raised borrowing costs to avoid rise in prices and asset bubbles.
