By CentralBankNews.info
Sri Lanka’s central bank left its key interest rates steady but raised the Statutory Reserve Ratio (SRR) on all rupee deposits by 150 basis points to 7.50 percent “to restrain the build-up of demand-side pressures on inflation to ensure continued monetary and price stability.”
The Central Bank of Sri Lanka, which cut its rate by 50 basis points in April, added that if the “current excess liquidity in the domestic money market continues to remain high for an extended period, it could lead to an undue expansion in monetary aggregates, fueling future inflation in the economy.”
The hike in SRR was largely unexpected as most economists had expected the central bank to raise its key rates in order to shore up the rupee which has fallen almost 7 percent since the central bank allowed it to float on Sept. 3, and has dropped almost 9 percent this year.
Today it was quoted at 144 to the U.S. dollar, steady after the central bank’s announcement.
The central bank noted the depreciation in the rupee, which it said reflected domestic and global developments, and said the view of its monetary board was that “external sector policies already implemented need to be further supported by some monetary policy tightening.”
The central bank’s key rate, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) were maintained at 6.0 and 7.50 percent, respectively.
Sri Lanka’s headline inflation rate rose to 3.1 percent in November from 1.7 percent in October while core inflation of 4.3 percent in November, slightly down from 4.4 percent in October, also suggested “rising underlying inflationary pressures in the economy.”
Earlier this month the International Monetary Fund (IMF) said the economic outlook for Sri Lanka remained uncertain with risks tilted to the downside, noting the boost in income from large increase in wages and salaries in the revised 2015 budget and lower administered prices. Together with a reduction in import taxes on vehicles, this has fed through to a sharp rise in imports, a deterioration the non-oil current account balance, rising core inflation and weak public finance.
It added that external risks had risen in line with the weaker global growth prospects and tighter global financial conditions that may rebalance further when the U.S. Federal Reserve raises rates.
The IMF forecast that headline inflation would average 3.3 percent this year, down from 6.9 percent last year, and then fall further to 1.1 percent in 2016 while core inflation would end this year at 1.2 percent this year before rising to 5.0 percent by the end of next year and rise further to 5.4 percent by end-2017.
The Central Bank of Sri Lanka issued the following statement:
Meanwhile, headline inflation, as measured by the Colombo Consumers’ Price Index (CCPI, 2006/2007=100), increased to 3.1 per cent, on a year-on-year basis, in November 2015 from 1.7 per cent in October 2015. On an annual average basis, headline inflation increased to 0.9 per cent in November 2015 compared to 0.7 per cent in the previous month. Following a similar trend, headline inflation based on the National Consumer Price Index (NCPI, 2013=100) also increased to 4.8 per cent, on a year-on-year basis, in November 2015 from 3.0 per cent in October 2015. Reflecting the firming up of aggregate demand conditions in the economy, the CCPI-based core inflation rate registered 4.3 per cent, on a year-on-year basis, in November 2015 vs. 4.4 per cent in the previous month and compared to its recent low of 0.8 per cent in February 2015. Meanwhile, core inflation measures, based on NCPI, also suggest rising underlying inflationary pressures in the economy.
If the current excess liquidity in the domestic money market continues to remain high for an extended period, it could lead to an undue expansion in monetary aggregates, fuelling future inflation in the economy. In that respect, the Monetary Board is of the view that it is appropriate to restrain the build-up of demand-side pressure on inflation to ensure continued monetary and price stability.
Accordingly, the Monetary Board decided, at its meeting held on 30 December 2015, to raise the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50 per cent to be effective from the reserve week commencing 16 January 2016. Furthermore, 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 their current levels of 6.00 per cent and 7.50 per cent, respectively. “
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