By CentralBankNews.info
Sri Lanka’s central bank left its key interest rates unchanged, including the standing deposit rate at 6.0 percent, saying it expects official reserves to rise during the year.
The Central Bank of Sri Lanka (CBSL) has maintained its rates since cutting them by 50 basis points in April.
Last week the International Monetary Fund (IMF) said the country’s financial system was stable and the current monetary stance appropriate, but a tightening bias appeared prudent in light of rising core inflation, a resurgence of private credit and signs of receding slack in the economy.
Sri Lanka’s headline inflation rate was an unchanged minus 0.2 percent in August from July but the IMF expects it to end the year around 3.0 percent, while core inflation rose to 4.4 percent in August from 3.5 percent in July due to higher demand for domestic non-tradable goods.
Earlier this month the central bank allowed the rupee to float freely by not setting daily spot prices, a move the IMF welcomed, adding that exchange rate flexibility would help maintain competitiveness and facilitate an increase in CBSL foreign exchange reserves.
The Central Bank of Sri Lanka issued the following statement:
In the monetary sector, broad money (M2b) recorded a year-on-year growth of 16.2 per cent in July 2015, driven entirely by the expansion in domestic credit aggregates. While credit granted to the private sector by commercial banks increased by 21.0 per cent, on a year-on-year basis, in absolute terms, credit granted to the private sector in July 2015 was Rs. 40.9 billion totaling to Rs. 245.9 billion during the first seven months of 2015. The increased credit flows to the private sector have been sustained mainly due to prevailing low market interest rates amidst low inflation environment. Meanwhile, the Central Bank has observed with concern the recent rapid growth of exposure of banks and financial institutions to certain categories of lending, in particular lending in respect of motor vehicles. Accordingly, with a view to preempt this trend which could develop into a system-wide risk to the financial sector, as a prudential measure, the Central Bank decided to impose a maximum Loan to Value (LTV) ratio of 70 per cent in respect of loans and advances granted for the purpose of purchase or utilisation of motor vehicles by banks and financial institutions supervised by the Central Bank. Going forward, the Central Bank will continue to be vigilant on the overall trends in the growth of credit as well as monetary aggregates and take preemptive measures in the case of emerging risks threatening the maintenance of price stability on a sustainable basis.
According to the Department of Census and Statistics (DCS), the Sri Lankan economy is estimated to have grown by 6.7 per cent during the second quarter of 2015, recording a growth rate of 5.6 per cent for the first half of 2015 compared to 1.3 per cent recorded in the corresponding period of 2014. Economic growth during the second quarter has been largely supported by the improved performance in the Services sector along with positive contributions from the Industry and Agriculture sectors.
Taking the above developments in the economy into consideration, the Monetary Board, at its meeting held on 25 September 2015, was of the view that the current monetary policy stance is appropriate. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 per cent and 7.50 per cent, respectively.”
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