Sri Lanka holds rates steady even as credit growth slows

15 August 2014 06:30 pm

ri Lanka’s Central Bank yesterday kept policy rates steady at multi-year lows for a seventh straight month, as expected, despite private sector credit growth slowing further.

Annual credit growth to the private sector was 2 percent in June, its lowest since April 2010, down from 2.2 percent in May, despite policy easing measures, Central Bank data showed.

The Central Bank, however, expects private sector credit growth to rise with ample rupee liquidity, lower short-term lending rates and falling long-term rates.
“The economy is in good equilibrium and macroeconomic conditions are in balance. So we decided not to make any changes to disturb that equilibrium,” Central Bank Chief Ajith Nivard Cabraal told Reuters.

The repurchase rate and reverse repurchase rate were left at 6.50 percent and 8.00 percent, respectively. A Reuters poll of 15 analysts had expected the central bank to keep the policy rates unchanged

Cabraal last week said there was a greater chance of a cut in key monetary policy rates than a hike, despite the International Monetary Fund’s advice to keep key rates on hold for the near term.

Between December 2012 and January 2014, the Central Bank cut the repurchase rate by 125 basis points and the reverse repurchase rate by 175 bps to stimulate growth.

The Central Bank expects the country to achieve economic growth of 7.8 percent this year, despite sluggish imports and a contraction in private sector loans and said first half data shows that growth is likely to remain “broadly on target”.

Market interest rates are facing downward pressure due to the Central Bank’s heavy purchases of dollars to stem appreciation in the rupee, which hurts exports.
The Central Bank said it has absorbed more than $1 billion from the market and dollar buying has boosted foreign currency reserves to around $9.2 billion. Falling interest rates have also boosted investment in the island nation’s stock market with the main share index up 9.32 since July 1.

“Right now what we are seeing is exports rising and imports declining, while investments and exports are covering the economy,” said Shiran Fernando, analyst at Frontier Research.

“So in the next 6-12 months, with so much liquidity in the market and a low rate environment, we expect consumption to gradually pick up.”

The outlook on inflation remains benign for now and the Central Bank believes price pressure can be contained despite an extended drought which is pushing up food prices.

Sri Lanka’s annual inflation crept up to 3.6 percent in July from a 28-month low of 2.8 percent the previous month due to costlier food prices.

Market interest rates are facing downward pressure due to the Central Bank’s heavy purchases of dollars to stem appreciation in the rupee, which hurts exports

On the economic front, GDP expanded 7.6 percent in the March quarter, propped up by strong government spending on massive infrastructure projects financed with external commercial funds. The trade deficit narrowed for the eighth consecutive month in May due to a contraction in imports.

The Central Bank expects broad money to grow by around 13 percent in 2014 compared with a previously forecast 14 percent.

(REUTERS)