Pvt. sector credit continues to drop after Aug. rate hike

Private sector credit, which acts as an important barometer of the robustness of the economy, continued to ease for the second consecutive month in October after the Central Bank raised policy rates in August.

According to the latest data released by the Central Bank, licensed commercial banks disbursed Rs.35.1 billion in fresh credit to the private sector in October, slightly higher than the Rs.29.1 billion in September, but logging a slump from a record high Rs.134.1 billion in August just prior to the effects of the August policy rate hike being felt across the economy.

The private credit in the month however marked 13.3 percent expansion in the year through October, slightly below 13.8 percent through September but within the desired range of 12 to 14 percent set by the authorities at the start of the year. 

According to the most recent data available, licensed commercial banks have in total given Rs.689.3 billion to the private sector, recording a fairly robust growth.  

The October credit growth is in line with the early indications by the Central Bank which roughly a fortnight ago pointed to a continued deceleration in credit through October citing provisional data. 

While the easing in credit could be a welcome sign from the perspective of the country’s rising inflation and keeping the foreign exchange crunch in check for sometime, it is yet to be seen whether the current pace matches with the desired credit level by the Monetary Board, as the country was recovering from a recession, which was then beset by Covid-19. Central banks world over are trying to walk a fine line between supporting their pandemic-struck economies while keeping price stability, which has been the main talking point for the most part this year, specially during the last four months. 

Full employment or drawing workers back to the labour force has also been part of the key monetary policy objectives, for which, an economy must be supported through easy money policies.  But the lingering inflation has brought the world’s central banks closer to raising the interest rates faster than they had earlier indicated or expected. 

For instance, Jerome Powell, the United States Federal Reserve Chairman who was re-nominated by US President Joe Biden for the second four-year term last Tuesday told a congressional hearing that “the risk of higher inflation has increased”, and appears more, “entrenched” and “therefore, it’s probably a good time to retire that word (transitory) and explain more clearly what we mean”. 

The US Fed, the Central Bank of Sri Lanka and many others characterised the inflationary pressures for months as ‘transitory,’ but they largely proved to be more persistent due to prolonged supply side bottlenecks. 
Meanwhile, Turkey is currently in an acute economic turmoil after its low interest rate loving President Recep Tayyip Erdogan in November fired his Central Bank Chief and then his Finance Minister last week for standing in the way for further rate cuts, which had sent up Turkey’s inflation to more than 21 percent and the Turkish Lira by 45 percent so far this year, plunging the leading emerging market economy into the brink of a full blown currency crisis.  

Turks are now forced to eat less, as many essential items are rationed and are forced to line up for subsidised bread, cutting down on their meat consumption and are fleeing to Europe seeking a better life. 

Sri Lanka saw a 9.9 percent surge in prices during November from a year ago with the food prices increasing by 17.5 percent, according to Colombo Consumer Price Index.