Central Bank keeps policy interest rates unchanged

Prof. W.D. Lakshman

• Says previous measures responded well to support economy beset by the pandemic
• Stresses commitment to maintaining low interest rate structure to ensure sustained economic recovery 
• Says private credit momentum seen in Feb. expected to continue, supported by low lending rates
• Says in talks with several bilateral partners for foreign funds to prop-up foreign buffers, though no specifics given 

The Monetary Board of the Central Bank yesterday left policy interest rates unchanged at current levels as the economy appears have responded positively to earlier measures taken to provide extraordinary support to individuals and businesses beset by the pandemic. 

Accordingly, the rate setting committee which met on Wednesday for the third time for this year decided to leave the anchor rates—Standing Deposit Facility Rate and Standing Lending Facility Rate at their historic lows of 4.50 percent and 5.50 percent respectively.

Policy rates were last slashed in July 2020 by 100 basis points bringing the total to 250 basis points in 2020. 

“The Board remains committed to maintaining the low interest rate structure, thereby ensuring continued support for a sustained economic recovery, in the context of the prevailing low inflation environment and well anchored inflation expectations,” the Central Bank said.

There was a clear change of tone in the April policy statement from the one issued in early March as  the Monetary Board turned more positive of the developments taking place particularly in the credit markets and the general economy as activities gained momentum, with a clear improvement in consumer spending, the last of many areas which took longer to gain momentum. 

The Board appears to be content with the acceleration in the private sector credit in February, where licensed commercial banks extended nearly Rs.80 billion, up from Rs.26 billion in January. The Central Bank remains upbeat about the trajectory of the private sector credit as they have set a target to expand it by 14 percent or over Rs.850 billion in 2021. 

“Growth of credit extended to the private sector gathered pace in February 2021. This momentum is expected to continue, supported by low lending rates, surplus liquidity in the domestic money market and the expected rise in lending to micro, small, and medium enterprise (MSME) sector,” the Central Bank said. 

However, few caveats remain in the areas of escalating food prices and the depreciating pressure on the rupee against dollar. 

While the Central Bank takes note of the near 10 percent increase in food inflation in March, accelerating from February, the officials believe that the prices would soften with the envisaged improvements in the supply chains in the medium term. 

While acknowledging that the country’s external front presents substantial challenges, which include a depreciating rupee against the dollar, dwindling foreign reserves and honouring the country’s foreign debt commitments, the Central Bank took solace in the recent improvements seen in the trade deficit driven by contraction in imports and healthy remittance flows. The recovering tourism sector is also expected to add more muscle into the foreign earnings. 

Making an attempt to alleviate concerns, Central Bank Governor Prof. W.D. Lakshman said they are currently in talks with several bilateral partners for foreign funds to prop-up foreign buffers, which according to him would result in positive outcomes in the next few weeks, though he fell short of giving out any specific information on it.