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Interest Rate Pass-through in Sri Lanka

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  • Amarasekara, Chandranath

Abstract

The Central Bank of Sri Lanka has increasingly been relying on interest rates as the instrument for conducting monetary policy. Changes to the key monetary policy variables, the Repo and the Reverse Repo rates, are initially expected to be reflected in the OMO rates and the call money market rates, before being passedthrough to commercial bank retail interest rates. It is important to obtain a good understanding of the speed and magnitude of the interest rate pass-through to make timely monetary policy decisions in order to meet the objective of economic and price stability. This paper examines the size and speed of the pass-through from policy interest rates to call money market rates and from call money market rates to commercial bank retail interest rates. The paper concludes that the CBSL policy decisions are efficiently transmitted to the short end of the money market within a matter of days. Also, the pass-through from policy interest rates to the call money market rate is almost complete. However, the pass-through from call money market rates to both lending rates and deposit interest rates of commercial banks is sluggish and incomplete. The only exception is, perhaps, the rates on lending to prime customers, which show a faster and a fuller pass-through. Also, there is no evidence of an asymmetry of pass-through over different phases of the interest rate cycle.

Suggested Citation

  • Amarasekara, Chandranath, 2005. "Interest Rate Pass-through in Sri Lanka," MPRA Paper 64865, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64865
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    References listed on IDEAS

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    Cited by:

    1. Rutayisire, Musoni J., 2017. "Modelling interest rate pass-through in Rwanda: is the interest rate dynamics symmetric or asymmetric ?," MPRA Paper 90178, University Library of Munich, Germany, revised 23 Sep 2018.
    2. W. S. Navin Perera, 2018. "An Analysis of the Behaviour of Prime Lending Rates in Sri Lanka," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 5(2), pages 121-138.
    3. Chandranath Amarasekara & Rahul Anand & Kithsiri Ehelepola & Hemantha Ekanayake & Vishuddhi Jayawickrema & Sujeetha Jegajeevan & Csaba Kober & Tharindi Nugawela & Sergey Plotnikov & Adam Remo & Poongo, 2018. "An Open Economy Quarterly Projection Model for Sri Lanka," IMF Working Papers 2018/149, International Monetary Fund.
    4. Kishan Abeygunawardana & Chandranath Amarasekara & C. D. Tilakaratne, 2017. "Macroeconomic Effects of Monetary Policy Shocks," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 18(1), pages 21-38, March.
    5. Roseline N. Misati & Esman M. Nyamongo & Anne W. Kamau, 2011. "Interest rate pass‐through in Kenya," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 10(2), pages 170-182, July.
    6. Biswajit Maitra, 2018. "Determinants of Nominal Interest Rates in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 265-288, March.
    7. Egorov, Aleksei V. (Егоров, Алексей В.) & Borzykh, Olga A. (Борзых, Ольга А.), 2018. "Asymmetric Interest Rate Pass-Through in Russia [Асимметрия Процентного Канала Денежной Трансмиссии В России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 92-121, February.
    8. Noura Abu Asab & Juan Carlos Cuestas, 2015. "Towards Adopting Inflation Targeting in Emerging Markets: The (A)symmetric Transmission Mechanism in Jordan," Working Papers 2015013, The University of Sheffield, Department of Economics.

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    More about this item

    Keywords

    Monetary Policy; Central Banking; Policy Interest Rates; Interest Rate Pass-through;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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