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Sri Lanka holds rates, amid external jitters

Jul 06, 2018 07:52 AM GMT+0530 | 0 Comment(s)

Sri Lanka holds rates, amid external jitters ECONOMYNEXT - Sri Lanka has held its main policy rate at 8.5 percent in June amid global jitters, which has triggered outflows from capital markets, the central bank said, with inflation ticking up slightly.

"Short term interest rates increased recently responding to the prevailing deficit liquidity conditions in the domestic money market," the central bank said.

"Yields of short term government securities displayed mixed movements in the recent past, while other market interest rates appear to have stabilised at elevated levels.

"While appropriate open market operations will address short term liquidity concerns, it is expected that nominal and real interest rates would gradually adjust downwards in line with the neutral policy stance of the Central Bank and the prevailing low inflation environment."

After loosening policy in April, the central bank has kept a fairly tight leash on money markets amid international jitters, with the dollar strenghtening. Liquidity shortages also develop when the central bank defends the currency.

"Tightening global financial conditions prompted some outflows from the rupee denominated government securities market and the secondary market of the Colombo Stock Exchange (CSE).." the central bank said.

Inflation in the 12-months to June rose to 4.4 percent from 4.2 percent, a month earlier,

Credit to private sector grew 15.3 percent in April and 15.1 percent in May.

In April private credit had grown 22 billion rupees and in May 29 billion rupees, though lower than the sudden 122 billion spike seen in March.

The full statement is reproduced below:

Monetary Policy Review: No. 4 – 2018

The Central Bank of Sri Lanka maintains policy interest rates at current levels

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 July 2018, decided to maintain policy interest rates at their current levels. Accordingly, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) remain at 7.25 per cent and 8.50 per cent, respectively. The Board’s decision is consistent with stabilising inflation at mid-single digit levels in the medium term, thereby contributing to a favourable growth outlook for the Sri Lankan economy.

Inflation to stabilise at mid-single digit levels despite temporary supply side pressures

Headline inflation, as measured by the Colombo Consumer Price Index (CCPI) and the National Consumer Price Index (NCPI), remained at low single digit levels, in spite of the transient acceleration mainly arising from the upward revisions to prices of domestic petroleum products and other administratively determined prices.

Core inflation also remained subdued, and inflation expectations remain favourable. Although pressures on domestic food supplies during the off-season could exert some upward pressure on prices in the short term, inflation is expected to remain at the desired mid-single digit levels during the remainder of the year and over the medium term, underpinned by firmly anchored inflation expectations and appropriate policy adjustments. 2

Economic growth remained subdued in the first quarter of 2018

According to the provisional estimates released by the Department of Census and Statistics (DCS), the Sri Lankan economy grew by 3.2 per cent, year-on-year, in the first quarter of 2018, compared to the revised annual growth rate of 3.3 per cent in 2017. Economic growth during the first quarter of 2018 was mainly driven by the Services and Agriculture related activities while the Industry related activities recorded a moderate growth. It is envisaged that the government’s continued commitment to the implementation of structural reforms will help the economy to attain its potential over the medium term, amidst fiscal consolidation.

The sustained recovery in the global economy is likely to support domestic economic growth, while the prevalence of a low inflation environment and an appropriately valued flexible exchange rate are also expected to facilitate higher growth.

Interest rates remain high both in nominal and real terms, while growth in money supply decelerated

Short term interest rates increased recently responding to the prevailing deficit liquidity conditions in the domestic money market. Yields of short term government securities displayed mixed movements in the recent past, while other market interest rates appear to have stabilised at elevated levels. While appropriate open market operations will address short term liquidity concerns, it is expected that nominal and real interest rates would gradually adjust downwards in line with the neutral policy stance of the Central Bank and the prevailing low inflation environment.

Meanwhile, the year-on-year growth of broad money supply (M2b) decelerated in May 2018. The growth of credit extended to the private sector by commercial banks too decelerated in the months of April and May 2018, following the festive season-led credit expansion observed in March 2018.

External sector performance buoyed by strong foreign exchange reserve position

The moderation of earnings from exports alongside the increase in import expenditure resulted in an expansion of the trade deficit over the first four months of 2018. The recent growth in imports was largely driven by the importation of personal vehicles and gold, and the latter is expected to have been addressed by the imposition of the customs duty on gold imports. Earnings from tourism and workers’ remittances continued their positive growth momentum so far during the year.

Tightening global financial conditions prompted some outflows from the rupee denominated government securities market and the secondary market of the Colombo Stock Exchange (CSE), although primary market inflows resulted in a net overall inflow to the CSE so far during the year.

Amidst these developments, the Central Bank recorded a net foreign exchange absorption of US dollars 141 million from the domestic market in the first half of 2018. With the successful issuance of the International Sovereign Bond (ISB) in April 2018, the receipt of the fifth tranche of the Extended Fund Facility with the International Monetary Fund (IMF-EFF), receipts from the divestiture of the Hambantota port and foreign exchange purchases of the Central Bank from the domestic market in early 2018, the gross official reserve position is estimated to have improved to around US dollars 9.2 billion by end June 2018, compared to US dollars 8.0 billion at end 2017.

So far during the year, the Sri Lankan rupee has depreciated against the US dollar by 3.6 per cent. Much of this depreciation was recorded since late April, reflecting the broad based strengthening of the US dollar in the international market. The Central Bank intervened in the domestic foreign exchange market to address speculative behaviour in the foreign exchange market and the unwarranted volatility in the exchange rate.

Unchanged monetary policy stance to sustain inflation at mid-single digit levels

Based on the recent developments and outlook for key macroeconomic variables, the Monetary Board of the Central Bank was of the view that the continuation of the current monetary policy stance is appropriate. The Central Bank will remain vigilant on global market developments and possible spillover effects, while continuing to closely monitor domestic real economic activity. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels.

 


 

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