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Sri Lanka holds rates as credit slows, market rates fall

Aug 03, 2017 07:39 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka's Central bank held policy rates unchanged in July as private credit slowed pressure on the currency eased and market interest rates also fell.

"The Monetary Board, at its meeting held on 02 August 2017, was of the view that the current monetary policy stance is appropriate and decided to maintain the policy interest rates of the Central Bank of Sri Lanka at their present levels," the Central Bank said.

"The Sri Lankan economy is expected to record a modest recovery in the forthcoming quarters following the low growth witnessed in the first quarter of 2017.

Inflation measured by Colombo Consumer Price Index and National Consumer Price Index was easing down at a faster pace in recent months, the Central Bank said in spite of "supply side disruptions" mainly on account of floods.

"Inflation is expected to ease further towards the end of 2017 and stabilise thereafter due to the tight monetary policy stance maintained since the end of 2015 and the dissipation of the ‘one-off’ impact of the tax structure on inflation," the central bank said.

Sri Lanka's inflation spiked after the currency collapsed in the wake of money printing by the central bank as it tried to resist market rate increase in 2015 and 2016 as credit demand picked up, triggering a balance of payments crisis.

Private credit was now easing.

"In view of high nominal and real interest rates prevailing in the market, it is expected that growth of monetary and credit aggregates would moderate further during the remainder of the year," the Central Bank said.

"The recent decline in the yields on government securities is expected to gradually transmit to other market interest rates in the forthcoming period.

"However, monetary expansion continued to remain high in May as well as in June 2017.

"While monetary growth was mainly driven by the expansion in domestic credit, net foreign assets (NFA) of the banking system also positively contributed to this expansion."

The steady accumulation of Net Foreign Assets analysts say shows that the central bank is no longer printing money to de-stabilize the banking system and economy to keep rates down.

Falling credit demand is now allowing the central bank to buy dollars from the market and accumulate forex reserves. Excess liquidity in money markets in recent weeks have come from dollar purchases and not money printed by the central bank unlike in 2015.

However interbank market rates continue to touch the 8.75 percent ceiling policy rate, partly due to sterilization of dollar purchases and repo auctions that withdraw cash. In July repo auction rates have fallen to around 7.3 percent. However it is not clear whether this is a sustained trend.
 


 

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