Central Bank Governor Arjuna Mahendran says further cuts in policy rates will depend on how the country’s inflation behaves in the coming months.
Sri Lanka kept its policy rates unchanged for the month of May after 50 basis points cut in April.
Accordingly, Standing Deposit Facility Rate and Standing Lending Facility Rate were kept at 6 percent and 7.5 percent respectively. “There could possibly be further cuts in the pipeline depending on how inflation expectations behave in the months ahead,” Governor Mahendran was quoted as saying to Bloomberg TV.
Sri Lanka’s inflation measured by Colombo Consumers’ Price Index remained at 0.1 percent in April, unchanged from the previous month. Year-on-year headline inflation has remained below 1 percent from February 2015 due to administered price cuts in fuel and consumer items. Annual average inflation declined further to 2.1 percent in April 2015 from 2.5 percent in the previous month.
It is projected that inflation would remain at low levels in the months ahead with improved domestic supply conditions and subdued prices of key commodities in the international market.
Analysts have noted that further rate cuts could widen the country’s current account deficit.Meanwhile, the Central Bank said credit to private sector grew 13.9 percent yoy in March 2015 to Rs.41.4 billion, raising cumulative increase in credit to the private sector by commercial banks to Rs.86.9 billion in the first quarter of 2015.
Based on Central Bank survey, the expansion of credit to the private sector was driven mainly by credit flows to the industry and services sectors.
“Given continued low market interest rates, it is projected that private sector credit would increase further in the period ahead supporting the growth momentum of the economy,” Central Bank said.
Sri Lanka will go ahead with a planned overseas sovereign bond sale “as soon as we feel investors are ready to dip their toes into the new economic policy environment,” Governor Mahendran told Bloomberg.
Central Bank said the US $ 400 million received from Reserve Bank of India through a swap arrangement, strengthened the official reserves.
Inflows from tourism, remittances and exports are expected to improve balance of payments during the year.
According to the Central Bank, the Sri Lankan rupee has depreciated against the US dollar by around 2 percent.