Features

July policy rates on hold

15 Jul 2014 - {{hitsCtrl.values.hits}}

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.

Features

July policy rates on hold

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

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

Most Popular Articles

Struggling Pizza Hut chain to be sold for $2.7bn

Iran war casts fresh shadow over Sri Lanka’s recovery

‘Two leaves and a bud’ becoming fiction as climate change hits tea: Dilmah Chief

Middle East conflict puts global spotlight on Colombo Port, World Bank tells government

Market stages strong recovery as ASPI surges over 740 points on renewed buying interest

Early rally fades as profit-taking leaves market mixed

Latest News

Speaker reaffirms Parliament’s support for National Commission on Women

Rohitha Rajapaksa leaves CCIB after five-hour statement

In Colombo, Bangkok this week, India and Pakistan met again for track 2 talks

Court of Appeal enters digital era with historic first E-Filing case

FIFA suspends Nepal over third-party interference