CB cautiously optimistic about Fed rate impact

4 January 2016 03:10 am Views - 2475

Says raising rates at this juncture would be damaging to economy

A possible rate hike in March by the US Federal Reserve as expected by some analysts will push Sri Lanka to reconsider its current monetary policy stance, Central Bank Governor Arjuna Mahendran said. 

“Some analysts out there are expecting another rate hike in March. If that transpires, then we’ll have a lot of volatility and we’ll have to review our monetary policy stance once again,” Mahendran told a press conference last week. 

“Let’s watch and see what the Federal Reserve does in the moths to come,” he added. He stated that raising interest rates at this juncture would be damaging for the Sri Lankan economy. 

“We don’t think it’s appropriate to raise interest rates at this point because interest rates are significantly higher than the inflation rate. 

It would be damaging for the growth of the economy.” Sri Lanka’s December inflation decelerated to 2.8 percent from 3.1 percent in November largely due to the lower base seen in December 2014. “We don’t want the general structure of interest rates in the economy to rise,” 

Mahendran asserted.  

The Central Bank last week only raised the Statutory Reserve Ratio on commercial banks by 150 basis points (bps) to 7.5 percent despite the wider expectation of a 25 bps policy rate hike, though the monetary authority admitted that demand side pressures were firming up in the economy. 

Hence, the banks can now only lend 92.5 cents against the 94 cents they were used to from every US dollar they receive by way of deposits.

According to Governor Mahendran, the decision was triggered by the overhang of excess liquidity in the money market. It has made some strains on the balance of payment, as lot of that credit is going out of the country, he said. 

“Banking lending is reaching a point that would stimulate inflation beyond levels we expect in 2016.”

However, Mahendran said Sri Lanka’s statutory reserve ratios are quite low by international standards.

“At 6 percent I would say they (statutory ratios) are quite low to other countries, where typically they are between 8 to 12 percent. Therefore sill at 7.5 percent, I would say its low by international standards.”

Meanwhile, Mahendran said the country has no need of emergency funding though the government was in informal talks with the International Monetary Fund (IMF) for “some sort of” facility. 

He also said the country’s foreign reserves ratios were at comfortable levels, though some of them were borrowed. 

Sri Lanka’s total foreign debt obligation for this year stands around US $ 4.3 billion inclusive of IMF payments and swap arrangements.

Sri Lanka’s economy grew 5.2 percent in the first 9 months of 2015 against 2.4 percent in the corresponding period of the previous year. 

The fiscal deficit in the first 9 months is estimated at 5.1 percent up from 4.8 percent in the same period of the previous year. Sri Lanka targets a 5.9 percent budget deficit for 2015.