ECONOMYNEXT – Sri Lanka’s lending and deposit interest rates have edged up in October, amid strong loan demand as banks scrambled to raise deposits, official data shows, despite a rate cut in May which mis-signalled the credit system.
Sri Lanka’s interest rates were edging up around August and September 2024 when the central bank printed 100 billion rupees deploying inflationary open market operations.
From September 2024, money was injected at 8.26 percent, when the repo rate was 8.25 percent effectively running a floor system (true single policy rate), triggering public outcry.
Floor systems have devasted government finances of Western nations, created public discontent, boosted stock prices, triggered cryptomania, pushed up gold to 4,000 dollar an ounce, and triggered need for macro-prudential surveillance analysts had warned.
In May, rates were cut again, this time mostly by ‘signalling’ through a scarce reserve regime.
Analysts had warned that flexible inflation targeting (cutting rates in a reserve collecting regime with a reserve target) is a spurious doctrine which rejects basic classical economic principles and had led to balance of payments troubles in the past.
In 2025 the rupee depreciated amid record current account deficits raising fears of a return to bad policy and further harming the public who had been battered with aggravated currency depreciation since the country ended a 30-year war.
Market priced interest rates maintains external stability, allow exchange rate to be inflation around the US or below, keeping export costs low, and can to a great extent avoid excessive credit cycles and Mal-investments.
In the past banks did not have to raise deposits to give loans as private credit picked up, as inflationary open market operations and outright purchases by the central banks allowed banks to monetize their government securities holdings triggering currency crises in the process.
In December Sri Lanka was hit by Cyclone Ditwah. The impact of Ditwah on the credit system is not clear.
“Any shock to the credit system from Ditwah will reduce loan demand, trigger a balance of payments surplus and a rise in excess liquidity if the dollars are purchased by the central bank and a fall in the interbank rate automatically,” EN’s economic columnist says.
“However, unlike the tsunami which dealt collective blow to the mindset of the people, Cyclone Ditwah has not had such an impact and people are scrambling to get back to normal.”
The government has announced that extra 500 billion rupees will be spent in 2025 on Ditwah related activities. The IMF is expected to provide a 200million dollar credit and additional funding is expected after an assessment by the World Bank. (Colombo/Nov08/2025)
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