• Decline driven by reduction in treasury bill yields and stable inflation
• Central Bank’s monetary policy continues to support lower borrowing costs

Sri Lankan banks’ prime lending rate fell below 8% in certain banks after almost three years with stabilisation in the financial sector, Central Bank data showed.

According to weekly indicators, the average weighted prime lending rate (AWPLR) increased by 3 bps to 8.59% last Friday (7) compared to the previous week.

Banks’ prime lending rates ranged from 7.92-10% last week. This decrease follows a reduction in treasury bill yields. The AWPLR has fallen by a net 37 basis points so far this year.

Monthly AWPLR for January stood at 8.66% registering a decrease of 26 bps from the previous month in December 2024.

During the week, a slight reduction was observed in the treasury bill yield rates in both the primary and secondary markets, the three-month treasury bill yield in the primary market has fallen by 76 bps (net) since the start of the year.

Treasury bond yields remained broadly stable and a decrease of 12.5% was observed in the total volume of secondary market transactions in treasury bills and bonds in the reporting week compared to the week before.

Bloomberg Intelligence said that Sri Lanka is enduring a bout of deflation, which has pushed up real rates but these deflationary conditions won’t last much longer as inflation is expected to return in May and converge with the Central Bank’s target of 5%.

“This would help the 12-month forward-looking real rate - currently around 6% - move back to the neutral range of 2.5-3% by year-end,” it added.

In addition, it said that the Central Bank does not view the deflation now as harmful to the economy, but as a correction of earlier strong price gains. Declines in consumer prices are reducing the cost of living- and that’s good for consumers.