The Central Bank said interest rates were declining with the 91-day Treasury down to 10.79 percent, the lowest since October 2006, but businesses said credit was still harder to come by.

"In line with the gradual easing of the monetary policy stance by the Central Bank, interest rates have been on a declining trend since the beginning of this year," the bank said in a statement on Thursday evening.

"This was bolstered by improved market confidence and investor sentiment with the end of the conflict, which resulted in an inflow of foreign investment to government securities," it said.

The Central Bank said this trend was underscored by the new developments in relation to the financing facility by the IMF, where the Executive Board of the IMF was to make a final decision—which officials here said is for formalities sake—on July 24.

Dealers said the market reacted to the positive news of the IMF facility and bidded lower at the Treasury bill auction last Wednesday.

"The yield rate on Treasury bills with a maturity of 91 days declined by 26 basis points to 10.79 per cent, the lowest since early October 2006," the Central Bank said after the auction.

"This trend was reflected in the yield rates of Treasury bills with maturities of 182 days and 364 days. A similar trend was observed in the yield rates of Treasury bonds in the secondary market as well," the bank said.

The Central Bank said the total reduction in Treasury bills thus far during the year is in the range of 654 and 699 basis points.

Meanwhile dealers said the impact of the first tranche of the US$ 2.5 billion IMF loan, amounting to US$ 313 million) would be seen once it arrives into the country but dealers are expecting interest rates to come down further in future.

The Central Bank said interbank call money rates have also reached their lowest levels since the first quarter of 2006.

Executive Director, Wealth Trust Corporation, Mangala Boyagoda said the Central Bank was giving a clear indication to commercial banks that it wanted more credit to be created in a bid to stimulate the economy.

"With inflation on a declining trend the Central Bank is now able to formulate its monetary policy in such a way as to affect reduction in lending rates and this is very important for a country where credit creation is very low," he told the Island Financial Review.

He said the market would expect interest rates to come down further once the IMF loan comes through but cautioned that it may be a short term phenomenon.

"It all depends on the monetary policy of the Central Bank and the fiscal policy of the government. For the short term I perceive a reduction in lending rates but it is difficult to say for the long term,’ Boyagoda said.

He said that commercial banks were still concerned about their non-performing loans.

Secretary General/CEO, National Chamber of Commerce of Sri Lanka, E. M. Wijetillake said the businesses are still finding it difficult to cope with prevailing rates interest on loans.

"We do see interest rates coming down but the present levels are still a problem. We also see banks continuing to be reluctant in lending," he told the Island Financial Review.

Dealers said the Central Bank was keeping the market at high surplus positions. Last Thursday the interbank rupee market held a surplus of Rs. 16.2 billion.

The Central Bank said this is a healthy position, but dealers were reluctant to refute or confirm this.

"One thing is very clear however, the Central Bank wants interest rates to come down," a dealer said.