Financial Times

Central Bank continues current rates

The Monetary Board of the Central Bank said last week that it had reviewed the Bank's monetary policy stance and was of the view that given recent economic developments and conditions in financial markets, the current monetary policy stance of the Bank would be left unchanged and that the policy rates would be maintained at its present levels.

The Bank said the following provides an assessment of the factors that were taken into consideration in arriving at this decision:

Real sector

Based on realised data and available information, the real sector in 2003, which has been boosted by the recovery in exports, higher private consumption and investment, can be expected to achieve the level of growth of 5.5 per cent projected at the beginning of 2003. The growth momentum is expected to continue in 2004, mainly driven by the external sector, as the recovery in the major economies, particularly the US, becomes more firmly established. The prevailing drought and the current uncertainty in the market may have some dampening impact on the real sector. However, an early turnaround in these conditions could be expected to restore the growth momentum.

Consumer prices

The sustained downward movement in inflation has continued in 2004 with the annual average change of all consumer price indices declining further. The Sri Lanka Consumer Price Index declined from 2.6 per cent at end 2003 to 1.9 per cent at end January 2004.

The Colombo Consumers' Price Index (CCPI) decreased from 5.2 per cent in January 2004 to 4.4 per cent in February and the Colombo District Consumer Price Index (CDCPI) from 1.6 per cent in January 2004 to 1.2 per cent in February.

The monthly price movements in the CCPI and the CDCPI in February, however, indicate mixed movements, although the magnitude has been small, indicating relatively stable prices. Current trends in inflation seem to suggest that the inflation forecast for 2004 in the monetary programme continues to be valid for policy purposes.

Fiscal sector

As required by the Fiscal Management (Responsibility) Act 2002, the Minister of Finance and the Secretary to the Treasury presented a Pre-election Budgetary Position Report. According to the revised estimates given in the report, the budget deficit is expected to increase by about 0.5 percentage points of GDP to 7.3 per cent of GDP in 2004. The increase in the deficit is on account of lower taxes and increases in current expenditure, although part of the increase in current expenditure will be offset by lower capital expenditure as a result of lower disbursement of donor assistance. The net effect of these revisions will be an increase in net domestic borrowing to Rs.87 billion. However, given that there is no further increase in the fiscal deficit and the projected resources in the domestic non-bank sector (over Rs.105 billion) are higher than the borrowing requirement, this increase in the borrowing requirement is not expected to exert excessive pressure in the domestic market.

Monetary Developments

The growth in monetary aggregates moderated slightly in January 2004 to 15.1 per cent from 15.3 per cent at end 2003. The domestic rupee market continues to remain in liquid, although the level of excess liquidity declined to around Rs.5-6 billion in early March 2004. Currency demand has continued to rise and is expected to increase further until April, due to the forthcoming elections and the festive season. Although this is expected to increase reserve money above the normal level temporarily, reserve money is expected to return to the projected path by the end of April, with the return of currency demand to normal levels.

Interest rates

Market interest rates have shown mixed movements. At the very short end of the market call market rates declined from the levels seen in January and fluctuated within a narrower range. However, yield rates on government securities across all maturities moved upward, although they have once again stabilised. The average weighted prime lending rate (AWPR) and the average weighted deposit rate (AWDR) continue to fall, albeit slowly.

Exchange rate

The exchange rate has experienced greater variability since the announcement of the dissolution of parliament on February 7. Negative market sentiment in addition to the usual seasonal import demand for dollars, have been cited as reasons for the wide fluctuations in the exchange rate. Although the rupee dollar rate depreciated at a relatively higher rate after February 7, it has shown greater stability at end February and in early March.

Monetary policy

Given the current economic developments and conditions in the financial market, the Central Bank has decided to leave the current monetary policy stance unchanged. The Bank will continue to monitor market developments carefully and revise its monetary policy stance as appropriate. The next regular statement on monetary policy would be made on April 16.

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