CB leaves policy interest rates unchanged to support recovery

• Says recent bouts of inflation appear transitory and ready to act should they turn persistent 
• Expects no demand-side pressures on prices as aggregate demand still stands at subdued levels
• Admits monetary stimulus can prop up output only thus far and insists on structural reforms to sustain growth 
• Expects economy to have grown by 3% to 3.5% in 1Q; full year growth expected at 5%

As broadly expected the Monetary Board left the current accommodative monetary policy stance unchanged yesterday to further support the economy beset by the pandemic-induced restrictions.

But the Board appeared to have given some serious thought on the recent spikes seen in consumer prices as they said they stand ready to take preemptive actions should they observe sustained inflationary pressures. 

The Monetary Board left the Standing Lending Facility Rate or the rate at which liquidity is injected into the banking system at 5.50 percent, while the Standing Deposit Facility Rate or the rate at which the excess bank liquidity is absorbed at 4.50 percent, unchanged from July last year when the Board slashed key rates by 100 basis points for the final time. 

The buildup of inflationary pressures appeared to have made significant part of the agenda at this week’s policy meeting, but the Board saw no need to move immediately as the recent flare-ups in prices were predominantly caused by supply-side disruptions triggered by the virus-related restrictions. 

Speaking to the media during a virtual press conference held yesterday after the release of the monetary policy announcement, Central Bank Governor Prof. W.D. Lakshman said they do not expect demand-side pressures on the prices, as the aggregate demand still stands at subdued level.  

This makes the case for continued monetary and fiscal stimulus to make up for the slack still prevailing in the economy, which may have further deepened by the two-month long restrictions, which blunted the growth momentum continued through mid-April. 

Hence, the Central Bank continued to maintain its medium term inflation target at 4-6 percent band. 
“The envisaged improvements in aggregate demand conditions stemming from the effects of the stimulus measures adopted by the Central Bank and the government and the likely increases in global commodity prices, may generate some inflationary pressures over the medium term,” the monetary policy statement said. 

“Such pressures will be mitigated through timely policy intervention by the Central Bank, thereby ensuring the maintenance of inflation in mid-single digit levels over the medium term,” it added. 

Meanwhile, the Central Bank expects the economy to have recorded a higher than expected growth during the first quarter of which the official data are expected to be released by the Census and Statistics Department today. 

The Central Bank expects the country’s economic output to have expanded by between 3.0 - 3.5 percent during the first quarter and expects the full year growth to come at 5.0 percent, down from the original 6.0 percent due to the decline in the broad economic activities in the second quarter. 

Defending the 5 percent growth on the back of a low base in 2020 and the ongoing monetary and fiscal stimulus being unleashed to prop up the output, Dr. Chandranath Amarasekara, Director of Economic Research at the Central Bank however said for a sustained growth, the economy would require some serious reforms in its structure because the stimulus could only provide a short-term boost. 

“We are aware that the monetary stimulus can help the growth performance in the short term but for us to sustain the growth performance beyond 2021 we will need several conducive policy measures and speedy implementation of those,” Dr. Amarasekara added.