Economy

July monetary policy on hold; long-term lending rates to ease

25 Jul 2013 - {{hitsCtrl.values.hits}}

The Monetary Board of t he Central Bank (CB) yesterday decided to keep the current monetary policy on hold leaving the repurchase rate and the reverse repurchase rate at 7 percent and 9 percent, respectively.

The Central Bank Governor recently told Wall Street Journal that a relaxation in the monetary policy further is likely in September or October subject to the direction of inflation.

Despite the 50 basis point rate cut in May, the headline inflation eased to 6.8 percent in June from 7.3 percent a month earlier. The governor’s hopes for a third round of easing to spur economic growth was based on the monetary authority’s expectations of inflation to remain in single digit levels for the remainder of the year.

This is due to the expected supply side improvements and the absence of demand-driven inflation.

Meanwhile, the Central Bank also expects the interest rates of long-term loans to the private sector to further decrease in the ensuing months.

In fact, despite the two rounds of easing measures in December 2012 and May 2013, the commercial banks were slow in bringing down their lending rates and as a result, the Central Bank went to the extent of cutting the interest rates on delayed payment of credit card balances from 4 percent to 24 percent.

However, ex-Central Banker and veteran economist W.A. Wijewardena recently argued that the Central Bank had chosen the wrong interest rate to tame the banks. As a consequence of this move, he even cautioned of accumulation of unpaid credit card balance in the system just like in South Korea in 2007, which can threaten the stability of Sri Lanka’s financial system.

As the commercial banks seemed little responsive to the Central Bank’s advice, the CB went on to reduce the statutory reserve ratio in June, which is believed to have released at least Rs.45 billion to the system.

The Central Bank however said that a downward movement was observed in Treasury yield rates, as well as in the short-term lending and deposit rates of major commercial banks.

Economy

July monetary policy on hold; long-term lending rates to ease

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