Rising liquidity, less credit disbursement concerns Central Bank
View(s):The Central Bank’s (CB) Monetary Board, introduced a set of measures on Tuesday, intended to actively encourage commercial banks to utilise substantial amounts of excess liquidity to enhance the flow of bank credit to the private sector at more reasonable interest rates.
“Such a move would support the growth momentum of the economy, given the low inflation environment,” the CB said in a media statement.
The Monetary Board, at a meeting on September 22, decided to limit the access of OMO participants to the Standing Deposit Facility (SDF) of the CB at the currently applicable SDF Rate of 6.50 per cent to a maximum of three times per calendar month, and ay deposits at the SDF window exceeding three times by an OMO participant to be accepted at a reduced interest rate of 5 per cent per annum. “This measure will be effective from September 23 until further notice. For the remainder of the month of September 2014, access to OMO at the SDFR will be limited to twice per participant. In addition, the daily auction facility will be suspended with effect from September 23 until further notice. The Standing Lending Facility Rate (SLFR) will remain unchanged at 8 per cent,” it said.
In the meantime, the Sri Lankan economy performed well during the second quarter of 2014 with a real GDP growth of 7.8 per cent compared to the 7.6 per cent recorded in the first quarter of 2014. The growth in the second quarter was led by robust performance in the industry sector, while the agriculture and the services sectors complemented the overall economic performance. The growth of 7.7 per cent in the first half of 2014 augurs well in meeting the expectations for the year, the report said. “The low inflation environment continued as inflation remained benign in August 2014 with year-on-year (y-o-y) headline inflation at 3.5 per cent and core inflation at 3.9 per cent (y-o-y). On an annual average basis, headline inflation was at 4.5 per cent while core inflation was at 3.2 per cent.
Looking ahead, the positive impact of the recent reduction in administered prices for energy and fuel is expected to be reflected in price levels from October. Accordingly, inflation is projected to remain comfortably at around 3-4 per cent by end year, compared to the previously envisaged range of 4-5 per cent,” the CB said.
Although the trade deficit during the month widened particula3rly as a result of higher expenditure on petroleum imports in July 2014, on a cumulative basis, the trade deficit in first seven months of 2014 recorded a decline compared to the corresponding period in 2013. Along with these developments, continued inflows to the financial account resulted in an estimated surplus of over US$ 2 billion in the balance of payments (BOP) during the first seven months of the year. So far during the year, the CB has absorbed over $1 billion from the domestic foreign exchange market, and gross official reserves remained above $9 billion, equivalent to around 5.9 months of imports.
“The Monetary Board has observed in recent months that the credit extended to the private sector by commercial banks has remained modest in spite of the continued easing of monetary policy, resulting in the accumulation of a large amount of excess liquidity in the domestic money market. In this regard, the Monetary Board has been of the view that such liquidity must ideally be utilised for productive economic activities instead of remaining unutilised for a considerable length of time in the system. The Board has also noted that these excess funds have been placed by several commercial banks on a continuous basis with the Central Bank under its standing deposit facility window, although such window has been essentially designed to provide an opportunity for OMO participants to deposit their excess liquidity at infrequent intervals to tide over temporary liquidity excesses.
In that background, the Monetary Board was of the view that an appropriate monetary policy action needs to be implemented to address these concerns, particularly in view of continued low levels of inflation and benign inflation expectations,” it said.