UPDATE 1-Sri Lanka cuts reverse repo rate by 50 basis points
(Adds details, quotes)
COLOMBO Jan 2 (Reuters) - Sri Lanka's central bank slashed the reverse repurchase rate by 50 basis points to 8.00 percent on Thursday, as expected, a move it hopes will reduce commercial banks' interest rate spreads over time.
Analysts said the move was to encourage lending and boost private sector credit growth to help expand the economy.
The central bank renamed its repurchase rate and reverse repurchase rate as the standing deposit facility rate and the standing lending facility rate. It left the standing deposit facility rate unchanged at 6.50 percent.
The Monetary Board feels the "volatility in the interbank call money market has reduced substantially", allowing a narrowing in the difference between the reverse repo and the repo rate, the central bank said in a statement.
"It is expected that this compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to their customers."
The standard spread between deposit and loan rates is 4 percent, but it can reach 10 pct depending on the customer's creditworthiness.
The central bank also said it has decided to stop providing collateral to the participants in the open market operation under standing deposit facility (repurchase) with effect from Feb. 1. 2014.
The bank also removed a minimum cash margin requirement of 100 percent against letters of credit opened with commercial banks for the import of certain categories of motor vehicles, considering the improvement in the external sector.
It said the trade deficit in the first 11 month has narrowed 10.7 percent to $7.8 billion.
SLUGGISH CREDIT GROWTH
During the 11 months between December 2012 and October 2013, Sri Lanka cut its key policy rates by 125 basis points to boost economic growth, which is estimated to have been 7.2 percent last year, compared with 6.4 percent in 2012.
Yields in benchmark 91-day T-bills have fallen 302 basis points since the central bank started easing monetary policy in December 2012, while yields of 182-day and 364-day T-bills have dropped 425 basis points and 450 basis points respectively.
However, credit growth in the private sector has been sluggish, the latest central bank data showed.
Credit to the private sector slowed to 7.4 percent year-on-year in October, compared to 7.6 percent a month ago and 25.1 percent a year ago.
"The central bank is trying to boost confidence in the economy by encouraging lending through lower interest rates," an economist said on condition of anonymity.
"But business firms and people are concerned about high taxes. So it might take some time for them to adjust."
Investors have been wary of Sri Lanka's policy environment because of inconsistency in the past. The government, for example, raised taxes on the banking, retail and telecommunication sectors in its 2014 budget presented in November.
A Reuters poll of 10 analysts had expected the central bank to cut the both key monetary policy rates by 50 basis points. (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Eric Meijer)
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