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he cycle of monetary easing in Sri Lanka will soon end and the country will start to see its monetary policy being tightened as early as from 2015, a global banking giant said in a recent report.

According the report, inflation is set to pick up during the rest of the year, triggered by higher demand when the lagged effects of the eased monetary policy kick in.  
HSBC global research said that Central Bank may keep monetary policy on hold for the rest of the year but may need to change its direction and begin to tighten it, although that may not happen until 2015.

“The Central Bank may remain on hold for the rest of 2014, but may well need to tighten next year,” HSBC said in its Asia Central Bank guide 2014.

The Central Bank may remain on hold for the rest of 2014, but may well need to tighten next year

Sri Lanka’s growth-biased Central Bank has been on an easing mode since December 2012. Key policy rates - Standing Lending Facility Rate (SLFR) and Standing Deposit Facility Rate (SDFR) have been lowered to multi-year lows to 8 percent and 6.5 percent respectively.

Further, the credit cap imposed on the banking sector in March 2012 was lifted and statutory reserve ratio – the proportion of deposits maintained with the CB by the banks – was also cut by 200 basis points in 2013 to rev up the credit growth and to oil the wheels of the slow moving economy.

The Central Bank’s monthly policy meeting is scheduled to be held by the end of this week and the analysts forecast no change in the monetary policy in July and expect the Central Bank to continue its accommodative monetary policy despite extremely low credit growth.

Inflation is set to pick up during the rest of the year, triggered by higher demand when the lagged effects of the eased monetary policy kick in

The credit growth dropped to 3.4 percent in April, falling from 4.3 percent in March.

“Moreover, domestic demand decelerated in 2013, with both consumption and investment weakening. The reacceleration in GDP growth in 2013 was mostly led by improvements in net exports,” HSBC said. Sri Lanka’s headline inflation fell to 2.8 percent, according to government statistics.