July policy rates on hold

15 July 2014 05:01 am

espite low credit growth, the Central Bank yesterday decided to keep its key policy rates unchanged for the sixth straight month as the Monetary Board deemed that the current rate regime is quite appropriate with the country’s growth and the inflation direction.

“Rate cut is not yet due particularly because the effects of our previous policy measures need to also be filtered down properly to the economy,” Central Bank Governor Ajith Nivard Cabraal told Bloomberg TV.

Hence, both the Standing Deposit Facility Rate and the Standing Lending Facility Rate will remain at the current levels of 6.5 percent and 8.0 percent, respectively.

Sri Lanka’s economy grew 7.6 percent year-on-year (YoY) during the first quarter and the headline inflation further declined to 2.8 percent in June YoY from 3.2 percent in May, according to the Census and Statistics Department data.

Rate cut is not yet due particularly because  the effects of our previous policy measures need to also be filtered down properly to the economy

However, economists cautioned of inflation, as in the case of Sri Lanka, there is a lag period between the policy measures and their impact on the inflation and therefore, warned that further expansionary monetary policy might build-up to imbalances and overheating of the economy.

Meanwhile, Cabraal told that the credit growth would be watched carefully and urged the banks to reduce their lending rates further while tightening their spreads to provide further stimulus to the private sector to demand credit from the banks as the credit growth has been particularly low.

Private credit growth in May decelerated to 2.2 percent, slowing from 3.4 percent in April.

The Central Bank has been using moral suasion to encourage banks to increase the credit growth.

“Credit growth has been slow because now there are many other sources the money coming into their businesses,” Cabraal said.

The government and the Central Bank have opened up many avenues for the corporates to access other sources of funding through corporate bond markets and foreign currency capital markets.

Private credit growth in May decelerated to 2.2 percent, slowing from 3.4 percent in April

In addition, in a low inflation regime, the demand for credit from the banking sector also comes down, reducing the pressure on banks.

Net credit to the government contracted by Rs.11.5 billion in May, while the credit to public corporations recorded a marginal decrease, the Central Bank said.
The Central Bank in June introduced a credit guarantee scheme for pawning in a bid to increase the credit growth as a sizable proportion of credit is obtained via this window, particularly for agriculture, SME and consumption purposes.  Nevertheless, economists forecast further easing in the monetary policy during the 2H14, if the credit growth fails to pick before being tightened towards early-2014.