Reining in bond yields crucial to keep lending rates in check: ICRA Lanka

As the Central Bank brushed aside the recent uptick seen in the yields of the government securities as an indicator of the overall lending rates in the market, ICRA Lanka Limited said the authorities would however have to rein in the bond yields to ensure the lending rates remain lower.

The sale of government securities—both bills and bonds—are driven by what is referred to as ‘guided yields’ by the Central Bank through directions issued prior to primary auctions.

“In any case, it is important to keep the yields in check to drive the lending rates down,” rating agency

ICRA Lanka said in one of its recent report.

The rating agency earlier went to the extent of forecasting another rate cut at the next policy meeting, should the private sector credit growth remained lull through the first quarter, after a subdued January.

However, defying the expectations, the country’s licensed banking sector delivered a robust growth in private sector credit in February, raising hopes of continued momentum through March, which is typically a month with higher credit disbursements ahead of the New Year festive season. During the first two months, the private sector credit has expanded by Rs.108 billion or one-eighth of the Rs.850 billion targeted for the year, setting the stage for the turnaround in private sector activity, which could usher faster economic growth.

Although the bill yields ticked up about 10 basis points and bond yields climbed by about 25 to 50 basis points through most of February, the signs of uptrend receded after the Monetary Board doubled down on their commitment to lower interest rates. Meanwhile, on the contrary to the claims by the bills and bond traders, the market lending rates have continued to decline as seen from the recent prime lending rates and the average new lending rates, which are indicators of the loans to the big businesses as well as to small businesses and individuals. The overnight market is still flushed with an excess liquidity of Rs.127 billion, up from Rs.120 billion a week earlier.