Central Bank sees no increase in interest rates in near term

Based on its current projections, the Central Bank yesterday said it is not expecting an increase in market interest rates in the near term.

“The recent movements in headline inflation, core inflation, inflation expectations, broad money growth, credit expansion, expansion in economic activity as well as the international reserve position, do not justify the view that a rational market would also expect an increase in interest rates,” the Central Bank said. 

The bank said its attention had been drawn to a few recent media reports claiming that the monetary authority is expecting a rise in domestic interest rates.  The reasons cited in those reports, the bank said, for such expectation, are a decline in reserves, higher than expected imports and increased interest rates on government securities.

“The Central Bank emphasises that based on its current projections, an increase in market interest rate is not expected in the near term.

With the decline in food inflation, headline inflation has reverted to mid-single digit levels faster than expected, while core inflation, which is an indicator of demand-driven inflation, has remained subdued. 

Inflation expectations, as measured by the Inflation Expectations Survey of the Central Bank, have moderated. Economic growth has remained below potential, implying that there is space for aggregate demand to expand without fuelling inflationary pressures.

Both broad money expansion and credit expansion have decelerated to expected levels by end-2017. Some fiscal sector indicators, such as the primary balance and revenue collection, have shown improvements.

With regard to the external sector, the official reserves are currently estimated at around US $ 7.9 billion, compared to US $ 6.0 billion at end-2016. 

The improvement in reserves is recorded on both quantitative and qualitative aspects, with the Central Bank purchasing US $ 1.7 billion from the domestic market on a net basis in 2017 and US $ 284 million so far during 2018.

Although the recent global market developments and domestic uncertainties attributed to non-economic factors have generated some volatility in the domestic market in the month of February, such volatility is expected to be short-lived. In fact, the foreign exchange market has already stabilised while speculation in the government securities market has also moderated substantially,” the Central Bank said.