Whither bank interest rates?

February, 25, 2014

Bank interest rates are a crucial factor in a country’s economic performance. The reason is due to the private sector obtaining more loans from the banks when interest rates are low and engaging in more economic activities and slowing down their economic activities whenever bank interest rates rise.

Though at first glance obtaining loans would seem to serve no purpose, this activity aimed at investments sans expectations for consumption is a factor that assists in economic development.

Central Bank of Sri Lanka Governor has said that the Central Bank’s interest rates which in turn decide the interest rates of commercial banks would be kept stable and unchanged within the following three to six months.

This is good news equally to the private as well as the people. This is since they are able to conclude that the interest rates of commercial banks would not fluctuate within this period. To an individual expecting to obtain a bank loan to fulfill his or her business dream or construct a house could prepare some plans through this.

The Central Bank Governor says there is no need to increase bank interest rates since inflation has decreased continuously.

Why can interest rates be stabilized when inflation decreases?

Inflation is the process of the normal prices of goods and services rising. In short, it is the increase in prices of goods. When the people obtain more loans while interest rates are down and spending more increases the cash supply. Hence, the competition of cash for the goods and services in the market increases their prices rise.

Hence, the banks do not provide loans always at low interest rates and the interest rates increase again whenever inflation rises.

The logical man

Hence, acting logically means, planning to obtain loans for economic activities whenever interest rates are low. Or else, what would happen is to slog for a lifetime while trying to repay the loans and thus fill the banks’ coffers.

There are many allegations by economic analysts that Sri Lankan banks pay lower interest rates to depositors while providing loans at higher interest rates and thus gain unreasonable profits.

These allegations seem reasonable when compared to banks in countries like Hong Kong which retain only a very marginal profit on interest rates.