Sri Lanka keeps policy interest rates steady

Sri Lanka’s Central Bank yesterday kept policy interest rates unchanged amid renewed foreign investor appetite for government securities (G-Sec) and negotiations for an International Monetary Fund (IMF) package, backed by structural reforms in the national economy.

 Accordingly, the Central Bank kept the policy deposit rate (SDFR) at 6.5 percent and policy lending rate (SLFR) at 8 percent. The reserve ratio for banks (SRR) was kept at 7.5 percent.
 The Central Bank said the growth of broad money (M2b)  indicated some deceleration, recording 18.9 percent in March 2016, compared to 19.8 percent in February 2016.

Private sector credit by commercial banks in March grew 27.7 percent year-on-year, compared to 26.5 percent a month ago. The government targets an average credit growth of 15 percent this year.
The expansion in domestic credit remained the key driver of broad money growth.

The Central Bank said the low level of excess rupee liquidity in the domestic money market due to previous monetary tightening measures has resulted in an upward movement in short term money market rates and other market interest rates.

“Reflecting the gradual transmission of increased short term interest rates to broader market interest rates, the expansion of monetary credit aggregates is expected to moderate from the second quarter of the year,” the Central Bank said.

Meanwhile, the Central Bank expects “some upward pressure” on inflation with recent increase in value added tax (VAT) and the supply side constraints that could stem from the prevailing adverse weather conditions.
“In spite of these temporary disruptions, inflation is expected to remain in mid-single digit levels supported by appropriate demand management policies,” the Central Bank noted.
Sri Lanka’s headline inflation in April rose to 3.1 percent year-on-year compared to 2 percent in March.