Sri Lanka maintains rate, low inflation to boost economy

December 12, 2014

By CentralBankNews.info
   Sri Lanka’s central bank maintained its key policy rates, as expected, saying the recent decline in oil prices would have a favorable impact on inflation and inflation expectations and thus “support the expansion of economic activity domestically.”
    The Central Bank of Sri Lanka – which has kept rates steady since October 2013, including the benchmark Standing Deposit Facility Rate (SDFR) at 6.50 percent – said leading indicators showed high economic growth in the second half of this year and continued improvement in macroeconomic fundamentals should bolster market confidence and nurture investor sentiment, enabling a high sustainable growth in the medium term.
    Credit to the private sector grew by 5.1 percent on an annual basis in October, affirming the rising trend. It added that the impact of the contraction in pawning advances had now ended.
    Sri Lanka’s headline inflation rate eased to 1.5 percent in November from October’s 1.7 percent as inflation remained in single digits for 70 consecutive months and below 5 percent in the last 12 months, the central bank said.
    The central bank targets inflation of 4-6 percent this year and 3-5 percent in 2015. In October the bank said inflation was likely to remain lower than 4-5 percent in the period ahead.
    Sri Lanka’s Gross Domestic Product expanded by an annual 7.8 percent in the second quarter, up from 7.6 percent in the first quarter.

    The Central Bank of Sri Lanka issued the following statement:

“Credit obtained by the private sector from commercial banks grew by 5.1 per cent on a year-on-year (y-o-y) basis in October 2014, reaffirming its increasing trend for the third successive month. In absolute terms, the increase during the month was Rs. 42 billion, out of which Rs. 36 billion was disbursed by Domestic Banking Units (DBUs) of commercial banks. The impact of the contraction in pawning advances on the overall credit growth that was observed since early 2013 has now ended. In spite of the ongoing recovery of private sector credit growth, broad money (M2b) growth (y-o-y) moderated to 11.5 per cent in October 2014 as a result of the decline in net foreign assets (NFA) of the banking system. Broad money growth has averaged 13.3 per cent during the first ten months of the year.
Headline inflation (y-o-y) remained at single digit levels for 70 consecutive months, and at levels below 5 per cent in the last 12 months. In October and November 2014, headline inflation (y-o-y) was even lower at 1.6 per cent and 1.5 per cent, respectively, mainly due to the downward revisions to domestic fuel and electricity prices. In the meantime, core inflation (y-o-y), which is more reflective of underlying trends in inflation, remained unchanged at 3.6 per cent in November 2014. The recent decline in crude oil prices in the international market is likely to impact inflation and inflation expectations favourably. Given Sri Lanka’s large dependence on imported sources of energy, lower inflation resulting from declining energy prices would support the expansion of economic activity domestically.
Leading indicators show strong signs of high economic growth as anticipated in the second half of 2014. In spite of adverse weather conditions and uncertain global conditions throughout the year, proactive policies adopted by the Government and the Central Bank have helped keep the economy on track to achieve growth projections for the year. Going forward, continued improvements in macroeconomic fundamentals would bolster market confidence and nurture positive investor sentiments enabling the maintenance of a high sustainable growth rate in the medium term.

In the external sector, volatile global conditions, cross currency movements and eased monetary conditions widened the trade deficit somewhat in October 2014. Nevertheless, given the continued and expected inflow of earnings from tourism, workers’ remittances, and inflows to the financial account, the balance of payments (BOP) is projected to record a higher surplus in 2014 than in the previous year. Accordingly, gross official reserves are expected to remain at comfortable levels by end 2014.
Taking the above factors into consideration, the Monetary Board at its meeting held on 11th December 2014, was of the view that the current monetary policy stance is appropriate, and accordingly, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank of Sri Lanka unchanged at 6.50 per cent and 8.00 per cent, respectively.

The date for the release of the next regular statement on monetary policy would be announced in due course.”

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