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Sri Lanka Central Bank says does not see hike in market interest rates

ECONOMYNEXT – Sri Lanka’s Central Bank said it does not expect an increase in market interest rates in the near term, contrary to speculation, with economic growth below potential, leaving space for demand to expand without fuelling inflationary pressures.

“ . . . the general public is advised not to be misled by false media reports on the Central Bank’s expectations on future behaviour of interest rates,” it said in a statement, responding to media reports claiming that the Central Bank expects a rise in domestic interest rates.

The reasons cited in the reports for such expectation are a decline in reserves, higher than expected imports and increased interest rates on government securities.

“The Central Bank emphasises that, based on its current projections, an increase in market interest rate is not expected in the near term,” the statement said.

“The recent movements in headline inflation, core inflation, inflation expectations, broad money growth, credit expansion, expansion in economic activity as well as the international reserve position do not justify the view that a rational market would also expect an increase in interest rates.”

The central bank said that with the decline in food inflation, headline inflation has reverted to mid-single digit levels faster than expected, while core inflation, which is an indicator of demand driven inflation, has remained subdued.

Inflation expectations, as measured by the Inflation Expectations Survey of the Central Bank, have moderated.

“Economic growth has remained below potential, implying that there is space for aggregate demand to expand without fuelling inflationary pressures,” it said.
“Both broad money expansion and credit expansion have decelerated to expected levels by end 2017. Some fiscal sector indicators, such as the primary balance and revenue collection, have shown improvements.”

The central bank also said that official reserves are currently estimated at around 7.9 billion US dollars compared to $6.0 billion at end-2016.

The improvement in reserves is recorded on both quantitative and qualitative aspects, with the Central Bank purchasing $1.7 billion from the domestic market on a net basis in 2017 and $284 million so far during 2018.





“Although recent global market developments and domestic uncertainties attributed to non-economic factors have generated some volatility in the domestic market in the month of February, such volatility is expected to be short lived,” the central bank said.

“In fact, the foreign exchange market has already stabilised while speculation in the government securities market has also moderated substantially.”
(COLOMBO, March 05, 2018)

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