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Sri Lanka not very concerned about monetary policy due to low inflation: Deputy CB Governor

ECONOMYNEXT – Sri Lanka can maintain low inflation and interest rates and has space to cut rates if economic growth dips and monetary policy was not a concern, Deputy Central Bank Governor Nandalal Weerasinghe said.

"Now we are ensuring the lowest ever interest rates in this country. Because inflation has been low, we have been relaxing monetary policy," Weerasinghe told a business forum at the Ceylon Chamber of Commerce in Colombo.

"And now, though interest rates are moving up and down, – that is the flexibility in the interest rates – but overall we maintain a low interest rate regime, thanks to the low inflation that we have right now.

"And we expect to maintain this even going forward. That is why we are not very concerned about the monetary policy part because we are confident we can maintain low inflation as well as low interest rates going forward.

"If we can maintain that we will have a stable exchange rate as well."

Sri Lanka’s inflation has been low due to moderate international environment where a rising US dollar has pushed down the price of imported and exported commodities and a loose rupee and domestic credit has been low or negative.

In the first quarter of 2015 in particular, the inflation index fell as the state cut prices of fuel which has generated credit financed losses at the petroleum utility.

The prices of some other traded commodities were also lowered, with tax cuts amid rising credit-financed consumption spending of the state especially salaries of state workers and subsidies, which has pushed up domestic demand and imports.

The inflation index rose only 0.1 percent in the 12-months to June with prices falling 2.3 percent in February after administered prices were cut. Since then the index has climbed 2.0 percent. In July cooking gas prices were cut again ahead of elections next month.

"Obviously what we see right now is our monetary policy regime is working much better than in the past," Weerasinghe said. "As I said inflation expectations are very well anchored".





Sri Lanka’s overnight rates are now around 6.0 percent with a policy rate corridor of 6.0 and 7.0 percent.

"Underlying inflation what we see – even if you take out the one-off impact of lowered petroleum prices or whatever the administrated prices – still underlying inflation is around 3 percent," Weerasinghe said.

"We have policy rates at 6 percent. We have very good space there in monetary policy if we think the economy is slow down then we have space (to cut rates). That is what we see.

"We will have to wait and see what the new government’s policies and then only we will be making a decision." (Colombo/July21/2015/Update – II)

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