CB keeps rates steady amid emerging economic imbalances

From left: Central Bank Governor Dr. Indrajit Coomaraswamy and Assistant Governor Mahinda Siriwardena during yesterday’s press conference 
Pic by Pradeep Dilruckshana

The Central Bank yesterday left its key policy interst rates unchanged in the backdrop of economic imbalances in the areas of monetary and external sectors and rising inflation.    
The decision to hold the standing lending facility and the standing deposit facility rate at 8.75 percent and 7.25 percent respectively, came at a time when private sector credit is growing considerably, inflation reaching higher single digit levels and trade deficit widening with rising imports and falling exports. 
But the Monetary Board of the Central Bank is of the view that the effects of the previous monetary policy action could bring the situation under control by the year end. The Monetary Board also left the bank’s reserve ratio at 7.5 percent. 
What is notable is, despite the multiple rounds of monetary policy tightening, the private sector credit grew by a whopping Rs.70.9 billion in February and Rs.82 billion in March bringing the total private sector credit granted during the first three months alone to Rs.172.6 billion.  
In 2016, the banking sector gave Rs.756 billion worth credit to the private sector alone. 
On a year-on –year (YoY) basis, the private sector credit grew by 21.0 percent and 20.4 percent respectively during the two months. 
The Central Bank is also appeared to have been baffled by the pace of growth in private credit. 
“I know the credit growth has been fairly high”, said the Central Bank Governor, Dr. Indrajit Coomaraswamy at a press briefing held after the monetary policy was announced. 
However, the Monetary Board is of the view that the total credit growth by the banks in the economy should moderate by the end of the year towards the level desired, which is around 15 percent. 
“As market interest rates remain substantially high, both in nominal and real terms, it is expected that credit extended to the private sector will decelerate to the envisaged levels by end 2017’, the monetary policy statement said. 
However, the total credit by the banks has grown by 18.6 percent during the first three months of the year, accelerating from the 17.5 percent growth recorded in 2016.

Coomaraswamy said the two biggest state lenders, Bank of Ceylon and People’s Bank, are operating with high amount of liquidity due to less lending made to the government corporations such as Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) during last year and such money is now being lent somewhat aggressively towards the country’s small and medium enterprise sector.
In 2016, the cumulative outstanding bank credit to the public corporations contracted to Rs. 27.9 billion from an increase of Rs.76.9 billion in 2015. 
Nevertheless, the trend has reversed during the first three months of 2017 as the CPC, Road Development Authority (RDA) and SriLankan Airlines have increased their borrowings while the CEB has repaid some of their loans. 
Meanwhile, the credit to the government continued to rise during the first three months. 
This pushed up the YoY growth in the money supply measured by M2b in the economy to 20 percent in March from 18.4 percent in February. 
“This included the expansion of credit to public corporations, some of which were affected by the impact of the drought and increased international energy prices”, the monetary policy statement noted. 
Given the recent borrowings from the international capital markets and proposed future borrowings, interest rates and the currency are expected to experience some respite in the short-term. 
But the building up of gross official reserves from borrowings amid the absence of long-term foreign fund inflows makes country highly vulnerable to currency movements. 

Sri Lanka does not want rupee to fall ‘too quickly’: Governor

REUTERS: Sri Lanka’s Central Bank does not want to allow the rupee to fall too quickly, Governor Indrajit Coomaraswamy said yesterday, but suggested further weakness in the exchange rate is on the cards as policy makers sought a competitive currency.
U.S. dollar inflows have helped the rupee stabilise after a sharp fall of around 14 percent in the last two years. The Central Bank, however, has been adjusting the spot rupee reference rate down, and the currency has fallen 1.7 percent so far this year.“The key thing is to have a competitive exchange rate. We don’t want to let it fall too quickly,” Coomaraswamy told reporters in Colombo after the Central Bank held policy rates steady earlier in the day. The Central Bank has allowed the currency to gradually depreciate since mid-December, revising its spot reference rate down multiple times as it sought to boost export competitiveness and spur a sluggish economy. 

It has said that defending the currency with foreign exchange reserves did not ‘seem sensible’.
The rupee has been hit hard by outflow of foreign funds since the U.S. Federal Reserve started tightening rates as well as from twin balance-of-payments and debt crises.
Coomaraswamy said proceeds from Friday’s US$1.5 billion sovereign bond is expected by end-week, while another US$450 million syndicated loan, which is “almost decided”, is expected next week.
The spot rupee, which hasn’t traded for four months due to indirect central bank intervention, resumed spot deals on Friday. It was not active yesterday. The Central Bank adjusted the spot reference rate to 152.10 from 151.90 last week.
Coomaraswamy said the Central Bank wants to reduce the gap between the spot and forwards by adjusting the spot reference rate downward, meaning there is more room for the rupee to decline.
“That shows where the rates should be. So we are going to gradually let the reference rate go a little bit,” he said.
“We are trying to see whether we can compress that (gap) and let the reference rate move in the direction of what seems to be the market rate.”
The Central Bank has targeted to boost foreign exchange reserves to US$7.2 billion by the end of this year, up from the current US$5 billion, through foreign borrowings and divestment of some state assets.
Coomaraswamy said the extra reserves could bolster its intervention firepower in the event of disorderly market moves.