Central Bank keeps policy rates unchanged

From left: CB Deputy Governor H. A. Karunaratne, CB Governor Professor W.D. Lakshman and CB Senior Deputy Governor Dr. Nandalal Weerasinghe
Pic by Waruna Wanniarachchi

• Awaits President’s upcoming policy statement
• Believes current monetary policy stance provides space for lending rates to reduce further
• Expects economic growth to slow down to 2.7-2.8% this year
• Downward tax revisions, reduction in selected administratively determined prices to soften inflation
• Country’s official reserves at US$ 7.5 bn by end November, sufficient to cover 4.5 months of imports

The Monetary Board of the Central Bank (CB) at the last policy review of the year decided to maintain policy interest rates at their current levels, awaiting the President Gotabaya Rajapaksa’s policy statement on 3rd January 2020, which is expected to provide further clarity to the broad economic policy framework as well as the fiscal policy direction for the medium term.
Accordingly, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the CB will remain at 7.00 percent and 8.00 percent respectively.
The Board which met for the first time on Thursday under the Chairmanship of newly appointed CB Governor Professor W.D. Lakshman arrived at this decision, following a careful analysis of current and expected developments in the domestic economy and the financial market as well as the global economy.

The CB was of the view that the current accommodative monetary policy stance is appropriate, and that there is ample space for market lending rates to reduce without further adjustment in policy rates. 

The Monetary Board further reasoned that the already announced tax relief as well as the proposed moratorium on capital repayments of bank loans for the SME sector are likely to provide further impetus to the economy. The CB expects the economic growth to slow down to 2.7-2.8 percent this year after recording 2.7 percent growth in the third quarter.
“Going forward, a steady revival of economic activity is envisaged, supported by improved political stability and short term measures to the stimulate economy. It is expected that this momentum will be sustained through the introduction of appropriate medium to long term structural reforms,” the CB said.

The CB emphasised that there has been a steady expansion in credit disbursed to the private sector in absolute terms during past four months.

In absolute terms, the private sector credit grew by Rs. 149.3 billion cumulatively since August to November contributing Rs. 191.8 billion cumulative increase during 11 months of the year.
In November, private sector credit recorded an increase of Rs 47.1 billion following an increase of Rs. 26.2 billion in October in absolute terms. However, private sector credit growth slowed down to 4.4 percent Year-on-Year (YoY) in November from 5.1 percent growth in October.

Going forward, the CB expects the growth of credit aggregates to recover gradually with the anticipated decline in lending rates coupled with the proposed moratorium on bank loans.  
Although, market lending rates continued to adjust downward in response to monetary and regulatory measures, the CB emphasised that the observed reduction thus far has been less than envisaged.

Driven by low credit expansion, the broad money supply also slowed down to 6.1 percent YoY in November from 6.7 percent in October. 

The decision of the Monetary Board is consistent to maintain inflation in the 4-6 percent range under flexible inflation targeting regime while supporting economic growth to reach its potential over the medium term. 

Headline inflation, as measured by the year-on-year change in both Colombo Consumer Price Index (CCPI) and National Consumer Price Index (NCPI), decelerated in November 2019 driven by the slowdown in food inflation.

The CB anticipates a further softening of inflation in the period ahead mainly due to the impact of the downward tax revisions and the reduction in selected administratively determined prices, although, weather affected food price movements could result in increased volatility in inflation in the near term.

So far during the year, the rupee has appreciated against the US$ by 0.7 per cent with mixed movements being recorded throughout the year.

Sri Lanka’s official reserves remained at US$ 7.5 billion by end November 2019, which were sufficient to cover 4.5 months of imports.