Sri Lanka keeps rates unchanged, expects credit to slow

ECONOMYNEXT – Sri Lanka is keeping policy rates unchanged in September though credit growth was at 28.5 percent in July it was expected to slow down with higher interest rates, the central bank said

"The expansion in monetary aggregates was mainly driven by credit flows to the private sector and the government from the banking system, while credit to public corporations continued to contract during the month," the Central Bank said

"The growth of credit granted to the private sector by commercial banks was at 28.5 per cent, year-on-year, in July 2016, compared to 28.2 per cent in the previous month.

"Market interest rates, which increased in response to monetary tightening measures of the Central Bank, are expected to slow down credit expansion in the months ahead."

The central bank raised its reverse repo rate at which cash in injected to the banking systm by 50 basis points to 8.5 percent in July. Banks have also been hiking deposit rates to meet rising credit demand. One year fixed deposits are now around 11 to 12 percent, up from 7-8 percent early last year.

Sri Lanka is now recovering from a balance of payments crisis, triggered by excessively by excessively loose monetary policy as large volumes of money was printed to finance a budget gap in 2015 and inexplicable keep markets flushed with excess liquidyt of about 20 percent of the money base.

But monetary policy improved in the second quarter of 2016, with the central ending its policy of monetizing large volumes of debt to keep markets short of cash instead of flushed in excess liquidity.

In the second quarter Sri Lanka was estimated to have grown by 2.6 percent, with agriculture contracting 5.6 percent with bad weather.

But services grew 4.9 percent and industry grew 2.2 percent.

Central Bank data released earlier showed that the two sectors were drawing credit, including to construction and property.

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Tourism receipts had grown 16 percent and workers remittances 4.5 percent during January to July and the trade deficit had marginally expanded 0.7 percent.
 

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