CB keeps policy rates steady despite scope for rate cut

Despite various macroeconomic indicators pointing towards the Central Bank’s ability to ease policy rates, the monetary and financial sector regulator yesterday opted to maintain rates due to the external economic environment and risks arising from the government’s budget.

Inflation in the economy is now within the 4-6 percent target range, while broad money supply has fallen to 16.7 percent compared to the 18 percent target, private sector credit growth has fallen to 14.7 percent compared to the 15 percent target, and the real effective exchange rate has received the necessary corrections according to Central Bank data.

In contrast, growth in 2017 was estimated to be 3.8 percent, well below the country’s growth potential of 5.75 percent.

“If you look at all the indicators, there were grounds for cautious satisfaction that the economy was stabilizing quite nicely. Why the monetary policy was not eased given that growth was muted and the economy is stabilizing? There were a couple of factors. One is the international dimension,” Central Bank Governor Dr. Indrajit Coomaraswamy said.

With growth picking up in advanced and large economies, they are opting for tighter monetary policies, attracting the attention 
of investors.

 “In a context where money is beginning to move from emerging markets generally to advanced markets, because of interest rate developments in the advanced economies, to reduce rates could lead to incentivizing outflows from the Sri Lankan economy,” Dr. Coomaraswamy said.

In addition, he said that oil prices have increased in the world market and may stabilize around US$ 60 per barrel, but in case that prices do rise above this, inflation in Sri Lanka could rise above the target 4-6 percent range.

The other major reason for rates to be kept stable was to observe government’s actions related to the fiscal sector during the last month of 2017, according to Dr. Coomaraswamy.

“We would like to wait and see what the actual fiscal outcome was for 2017 before we think of loosening monetary policy. Clearly, if there has been loosening of fiscal policy, it would not be wise to loosen monetary policy at the same time,” he said.

The Standing Deposit Facility Rate was maintained at 7.25 percent, while the Standing Lending Facility Rate was kept at 8.75 percent, and the Statutory Reserve Ratio was kept at 7.5 percent yesterday.

Despite the Central Bank having kept rates stable for over 10 months, business surveys conducted for the first quarter of this year had shown positive readings compared to the negative readings a year ago, indicating that growth would pick up this year compared to the disappointing year the country had in 2017 due to weather related anomalies, according to Dr. Coomaraswamy.

He said that the Central Bank was expecting growth to reach 5 to 5.5 percent this year.

“For that to continue and materialize for an even better outcome, the country needs political stability. So that is what we now need to have as quickly as possible,” he said, referring to the uncertainty that is currently persisting with regard to the country’s political future, following the local government election upset for the national government two weeks ago.

(CW)