Sri Lanka holds rates amid monetary expansion, rising imports
ECONOMYNEXT – Sri Lanka’s central bank said it was holding interest rates at record lows as credit and money supply expanded, pushing imports up and domestic assets of the central bank expanded amid state spending and borrowings.
The Central Bank said broad money defined as (M2b) grew 15.4 percent in May from a year earlier, accelerating from 13.9 percent a year earlier, with state borrowings from the banking system going up amid a recovery in private credit.
Private credit rose 48.6 billion rupees in May, or 17.6 percent from a year earlier.
At the beginning of the year, the Central Bank projected only a growth of 12 percent for M2b and 15.5 percent for private sector credit, though current numbers are partly due to a low base.
Amid strong credit growth imports are rising as the domestic economy cannot keep up with the demand.
In addition to foreign borrowings, which pushes up imports when spent domestically, the central bank itself has released tens of billions of rupees into the banking system, ending term repo deals that temporarily held liquidity back.
June and July data shows the acquisition of new domestic assets by the monetary authority.
The Central Bank said it was keeping its 6.00 percent policy rate to withdraw liquidity, and 7.5 percent rate to inject liquidity, unchanged.
The Treasury bill stock of the Central Bank, which is a proxy for printed money and reserve appropriations have had climbed to 65 billion rupees over about five weeks.
Though some of the excess liquidity in money markets have come from dollar purchases from state borrowings, the acquisition of Treasury bills show that monetary accommodation of credit is taking place below the policy rate of 7.5 percent, analysts say.
But the Central Bank said there was no need to raise rates as inflation was 0.1 percent in the 12-months to June, helped by state mandated price cuts of energy.
However global inflation has also been low amid a stronger dollar, which had pushed the money price of traded goods (exports and imports) down.
The Central Bank said foreign reserves rose to 7.5 billion rupees by end June, helped by a 500 million dollar swap from the Reserve Bank of India and a sovereign bond sale.
Though a central bank will buy dollars outright from a sovereign bond which is borrowed by a third party, through a swap reserves are borrowed directly by the monetary authority.
Another swap deal of 1.1 billion US dollars had been signed with RBI. (Colombo/July23/2015)