The Monetary Board of the Central Bank yesterday decided to keep the key policy rates unchanged amidst decelerating credit and import growth.
Accordingly, the Repurchase rate would remain at 7.75 percent while the Reverse Repurchase rate at 9.75 percent Sri Lanka jacked up policy rates twice since February to contain credit and import growths.
According to the Central Bank, the concerted efforts by the bank and the government earlier this year to curb the high demand for imports and credit are yielding results.
“Reflecting the impact of the policy measures taken, credit obtained by the private sector has decelerated since the second quarter of 2012, and the policy measures in place are expected to help ensure that the growth of credit will be within the desired level at year end,” the Central Bank said.
As the bank further pointed out, compared to the average monthly credit expansion of about Rs.52 billion in the first three months, average monthly credit decelerated to around Rs.27 billion during the period from April-July.
“Benefiting from this moderation, growth of broad money has also decelerated to below 20 per cent in July for the first time this year,” the bank said.
However, amidst the claims of possible slowing down of the economy due to the tight monetary policy adopted, the Central Bank stressed that the amount of credit available has been sufficient to facilitate reasonably robust economic activity.
Meanwhile the Central Bank said that import growth has decelerated considerably since April, outpacing the decline in export growth, improving the trade balance of the country.
It also noted that sustained inflows of workers’ remittances, enhanced tourist earnings have helped narrow the deficit in the current account balance.
It also said that growing inflows to the Colombo Stock Exchange and government securities have helped to ease pressure on the external sector, raising foreign exchange reserves over US $ 7 billion.
However, independent analysts and economists have already expressed their reservations regarding the foreign exchange position beefed up by borrowings from international sources and banks. They also point out that foreign exchange inflows that are coming in might not be enough to bridge the trade deficit in the wake of rising international oil prices.
Also they don’t ignore the possibility of another balance of payment crisis at the end of this year, given the debt servicing costs the country has to incur due to the colossal amounts it has borrowed from foreign sources.
Inflation will moderate- Cabraal
REUTERS: Sri Lanka remains vulnerable to inflation risks but prices are expected to moderate rather than strengthen, Central Bank Governor Ajith Nivard Cabraal said on Tuesday.
His comments came after the Central Bank kept policy rates unchanged, as expected, saying policies adopted to manage demand by the authorities are expected to help contain inflation in the single digits while economic growth slows.
“We think that inflation vulnerability still remains, but the chances are that it will be more on the side of moderating than increasing,” Cabraal told Reuters in a telephone interview.
Inflation in August eased to 9.5 percent from a year earlier from a 42-month high of 9.8 in July on improved food supplies.
“The downward revision of certain administratively determined prices, such as LP gas, and revisions to tariffs and levies on selected food items is expected to provide some respite from temporary increases in inflation arising from supply side shocks. Going forward, demand management policies adopted by the authorities are expected to help contain inflation within single digit levels,” the Central Bank said.
