Sri Lanka yesterday left the key policy rates unchanged as private sector credit saw some deceleration and inflation remained subdued.
Therefore, the Central Bank kept its Standing Lending Facility Rate (SLFR), the rate at which money is injected into the system, and Standing Deposit Facility Rate (SDFR) unchanged at 8.50 percent and 7.00 percent, respectively, for the third consecutive month.
The banks’ statutory reserve ratio was also left unchanged at the current 7.50 percent.
The demand for private sector credit and the direction of the headline inflation are the main two determinants used by the Monetary Board to decide the direction of the interest rates or the price of money in the economy.
Private sector credit growth slowed down to 27.3 percent or Rs.45 billion in August but still runs higher than the 20 percent levels required by the Central Bank.
However, this is less than the 28.5 percent year-on-year (YoY) growth or Rs.63 billion growth in private credit seen in July.
There is generally a lagging effect of monetary policy transmission and therefore the earlier tightening measures could further filter into the economy in the ensuing months.
With August figures now out, during the first eight months, credit granted to the private sector by the commercial banks has reached a total of Rs.456.3 billion.
This is in comparison to the Rs.696 billion granted as credit during 2015 when the private sector credit reached an all-time high.
Besides the moderation in the private sector credit, there have been some net repayments to the banking system by the government and the public corporations, which contributed to the contraction in the domestic credit granted in August.
During the first eight months however credit to the government increased by Rs.178.4 billion but the credit granted to the public corporations declined by Rs.81.5 billion during the same period.
“As a result, broad money (M2b) growth decelerated to 17.3 percent, year-on-year, in August 2016, compared to a growth of 17.8 percent recorded in the previous month,” the Central Bank said in its monetary policy press release.
Despite both the headline and core inflation remaining subdued at the mid-single digit levels,
the Monetary Board expects the increase in value-added tax (VAT), application of VAT on goods and services, which were previously exempted, and the Nation Building Tax to have one-off impact on inflation as seen in May/June 2016.
Excluding the expected transitory developments, the Central Bank is of the belief that inflation would remain at mid-single digit levels supported by prudent monetary policy measures and the realization of the improvements in the fiscal sector.
The International Monetary Fund has advised the Central Bank to migrate into an inflation targeting monetary policy regime.
The Central Bank recently said it would pursue more forward looking monetary policy, set within a medium-term framework, while leaning against any possible fiscal excesses created by the government.
Sri Lanka’s headline inflation measured by the Colombo Consumer Price Index (CCPI) rose to 4.2 percent in October from 12 months ago, accelerating from 3.9 percent in September as the food prices rose faster than the non-food prices, the data released by the Census and Statistics Department showed.
The core inflation, the increase in prices measured excluding items such as fresh food, energy, transport, rice and coconut, remained unchanged at 4.2 percent from September.
The CCPI for all items rose by 1.2 index points or 0.63 percent to 189.7 in October.
The annual average inflation – the percentage difference between the average price index of 12 months to October 2015 and the average price index of previous 12 months – also edged up to 3.6 percent in October from 3.4 percent in September. Food prices, which had the biggest impact on October prices, rose for the first time in three months by 1.3 percent on a Month-on-Month (MoM) basis as the prices of coconut, vegetables, limes, rice and some fruit varieties rose during the month.
On a year-on-year (YoY) basis too, the food prices rose by 6.0 percent, against 5.5 percent in September.
The non-food prices overall however remained unchanged from a month ago but the expenditure on recreation and culture and educational activities showed a slight increase during the month. The expenditure on housing and other utilities dropped slightly.
With the higher value-added tax (VAT) being implemented from today, the inflation is expected to rise faster, as the prices of food and a lot of other commodities are set to increase from November 1. The VAT is also slapped on telecommunication services and consultation fees of doctors and medical specialists (including channel services) and hospital room charges. But the public transport services, diesel, petrol and kerosene oil are exempted from the VAT. As the December festive season is closing in, the prices of goods naturally see an upward pressure due to the demand-driven inflation. December is usually a month with a higher inflation. The inflation could further rise if the rupee gets further weakened due to importer dollar demand and investors withdrawing from the government securities continue.
However, the Central Bank is confident it could maintain the inflation within the bands stipulated by the International Monetary Fund (IMF) under its three-year programme.
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