Sri Lanka reduces banks' emergency funding rate for the first time since 2003

Sri Lanka's central bank said on Thursday it will immediately adjust its bank rate, the emergency funding rate for commercial banks, to 10%, an effective reduction of 500 basis points, to align it with falls in key rates since last May.

The move underlines efforts by policymakers globally to provide support to economies hit by the coronavirus crisis.

The bank rate has been at 15% since August 2003 and this is the first time since then that any adjustment in being made.

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The bank rate is the emergency rate at which the Central Bank of Sri Lanka (CBSL) provides credit to commercial banks against acceptable collateralised assets.

It acts as a penalty rate, which is higher than other market rates and is known as a Lender of Last Resort rate at which emergency loans are provided to banks.

The CBSL cut its Standing Lending Facility Rate (SLFR) and Standing Deposit Facility Rate by 25 bps each to 7.00% and 6.00%, respectively earlier in April, its third cut in three weeks to tackle the coronavirus pandemic.

The bank has cut the key interest rates five times over the last year, starting with a reduction last May after the Easter bomb attacks that triggered a slump in investment and tourism.

The Monetary Board of the CBSL, at its meeting held on April 15 decided to allow the bank rate to automatically adjust in line with their SLFR with a margin of +300 basis points, it said.

"With effect from 16 April 2020, the Bank Rate, which is an administratively determined rate that could be used in periods of emergency, has been effectively reduced by 500 basis points from 15.00% to 10.00%," CBSL said.

Analysts said the move would help banks access emergency funding at much cheaper rates and is crucial at the current juncture when markets are highly volatile.

Sri Lanka so far has over 230 confirmed COVID-19 cases, far lower than its neighbours, but the central bank has taken several measures to tackle its impact on an economy that is highly dependant on tourism for its revenues.

"Given that the normal CBSL lending rate is 7% at the moment, an 800 bps margin to the emergency rate seems too wide and makes sense to set a 300 bps automatic margin instead," said Thilina Panduwawala, a senior product leader at Frontier Research.

"So now it will automatically adjust with policy rate changes".