CB keeps key policy rates steady

Private credit picks up by 2.6% in August

By Dilina Kulathunga  
The Central Bank (CB) yesterday decided to keep key policy rates unchanged for the ninth consecutive month in October as it sees a slight turnaround in the private sector credit growth and inflation remaining at benign levels with further downward pressure expected.

Hence the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at 6.5 percent and 8.0 percent respectively.

“We have seen the inflation subdued, we have seen the growth levels strong where we wanted to see at and the credit growth has been picking up, exports have been doing well. So, there is no need to make any changes. So, we are comfortable in keeping the rates unchanged,” the CB Governor Ajith Nivard Cabraal told Bloomberg TV soon after the policy decision.

The CB boasts of maintaining a single digit inflation for 68 consecutive months and in September the headline inflation eased to 3.5 percent Year-on-Year (YoY) (unchanged from August) while the annual average inflation declining to 4.2 percent from 4.5 percent in the previous month.  The CB expects further downward pressure on inflation due to the recently announced energy price reduction and continued deceleration of key commodities in international markets.

The headline inflation target for 2014 is 5.0 percent.
Meanwhile the restriction imposed on banks last month on parking excess liquidity to three times a month at the SDFR of 6.5 percent and 5.0 percent thereafter will remain unchanged until further notice. The move is seen as an effective rate cut
by the market.

Meanwhile in August, credit extended to the private sector expanded by 2.6 percent YoY after falling 4 ½ years low of 0.8 percent in July.  The CB projected private sector credit growth by end 2014 at 16.0 percent.  The commercial banks gave Rs.47.7 billion credit to the private sector in August, resulting in a cumulative private credit of Rs. 2,529.6 billion during the first eight months of 2014.

The cumulative credit extended to the private sector during the same period last year was Rs.2,464.6 billion.
The money supply (M2b) rose to 12.3 percent (YoY) in August from 11.9 percent (YoY) in July but the target for 2014 remains 14 percent.    
Though market interest rates are at historically low levels, the CB believes there is further room to for rates to come down as inflation is low.  
“Meanwhile, net credit to the government from the banking sector has increased by Rs. 60.9 billion in the first eight months compared to the projected bank borrowing of Rs. 100 billion for the year and credit to public corporations has declined by Rs. 27.2 billion during this period,” the statement from
CB stated.

Further, net foreign assets of the banking sector increased by Rs.289 billion during the first eight months due to the rise in foreign inflows to the government and private sector.