Borrowers see little relief as lending rates remain elevated despite a modest decline in benchmark lending rates, as higher borrowing costs continue to weigh on businesses seeking financing for expansion and investment.
Borrowers see little relief as lending rates remain elevated despite slight decline
Latest data from the Central Bank of Sri Lanka show that the Weekly Average Weighted Prime Lending Rate (AWPR) eased marginally during the week ended June 26, marking the first decline since the monetary authority unexpectedly raised policy interest rates in May. However, borrowing costs remain close to their highest levels in nearly two years, reflecting continued concerns over inflation and currency risks.
The AWPR, which serves as the benchmark lending rate for the country’s most creditworthy corporate borrowers, fell by three basis points to 10.39 percent from 10.42 percent a week earlier. While the decline offers a modest sign of easing, the benchmark rate remains significantly above the 8.11 percent recorded during the same period last year.
The latest movement follows the Central Bank of Sri Lanka’s decision in May to increase its Overnight Policy Rate by 100 basis points to 8.75 percent, the first policy tightening in almost three years. The rate hike was aimed at containing rising inflationary pressures and stabilising broader macroeconomic conditions after a period of rapid credit expansion.
Despite the slight reduction in lending rates, businesses continue to face elevated financing costs. Companies planning capital investments, business expansion and working capital financing are likely to remain cautious as higher interest expenses affect profitability and borrowing decisions.
Financial market conditions, however, showed some improvement during the reporting week. Total outstanding market liquidity widened to a surplus of Rs.61.62 billion by June 26, compared with Rs.31.25 billion a week earlier. Meanwhile, the Average Weighted Call Money Rate remained unchanged at 9.22 percent, indicating stable short-term interbank funding conditions.
Even with tighter monetary policy, demand for loans has remained remarkably resilient. Latest data showed private sector credit expanded by 29.1 percent year-on-year in April, remaining close to multi-year highs. Outstanding private sector credit reached Rs.16.66 trillion compared with Rs.14.93 trillion recorded a year earlier, highlighting continued demand for business and consumer financing despite higher interest rates.
The sustained pace of borrowing suggests that tighter monetary conditions have yet to significantly slow credit growth across the economy. Economists generally view strong credit expansion as supportive of economic activity, but prolonged rapid lending can also contribute to inflationary pressures if demand outpaces productive capacity.
Inflation has already shown signs of accelerating. The National Consumer Price Index (NCPI) increased by 5.4 percent in May, up from 4.7 percent in April, while core inflation also edged higher to 4.5 percent. Rising prices remain one of the key factors influencing lending rates, as financial institutions continue to price loans based on inflation expectations and broader economic risks.
Government securities also reflected the higher interest rate environment. Treasury bill yields remained around the 10 percent level during the week, with the benchmark 364-day Treasury bill yield standing at 10.17 percent. This compares with 7.94 percent recorded a year earlier, illustrating how funding costs have risen across the broader financial market.
Although the slight easing in the prime lending rate may offer some encouragement to borrowers, market conditions indicate that financing costs are likely to remain elevated in the near term. The future direction of lending rates will depend on inflation trends, monetary policy decisions and the pace of economic activity.
For now, Borrowers see little relief as lending rates remain elevated, with businesses continuing to navigate a challenging borrowing environment even as liquidity conditions improve and financial markets show early signs of stabilisation.