Central Bank cuts policy interest rates by 0.5 %
View(s):The Central Bank (CB) on Wednesday cut policy interest rates by 0.5 per cent with immediate effect saying current market interest rates are seen inconsistent “with the continued low inflation and investments needed to address concerns on economic growth for the year”.
Policy interest rates normally set the tone for the banking sector and the money markets to follow in its own application of lending and borrowings rates.
The CB said in a statement that the Monetary Board decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) to 6 per cent and 7.5 per cent, respectively, with effect from April 15.
“The monetary policy tool primarily adopted by the Monetary Board will continue to be the policy interest rates announced to the market with the support of other monetary policy tools. The relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behaviour of market interest rates are addressed sufficiently to facilitate the economic growth further in a low single digit inflation environment,” the statement said.
The CB said inflation is projected to remain at low mid-single digit level in 2015. “Therefore, there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook. If any of subsequent interim effects of further monetary relaxation are found to be of concern over other economic variables, a mix of other monetary policy tools is available to fine-tune such effects towards achievement of current objectives of the monetary policy,” it said.
The Bank said the external sector remained resilient with foreign currency inflows from export proceeds, workers’ remittances, and tourist earnings as well as inflows to the government securities and portfolio investments supporting maintenance of the exchange rate against US Dollar. This was without an unhealthy volatility on the strength of official foreign reserves increasing from US$6.8 billion as at end March 2015 to $7 billion at present.
Official reserves are projected to strengthen further with the proceeds pending from the currency swap arrangement between Sri Lanka and India and other identified regular investment inflows to a level of official reserves comfortable for supporting the exchange rate stability in the immediate future.
“Overall, the outlook in the balance of payments in 2015 remains favourable with continued inflows expected from current account related transactions, significantly lower expenditure on petroleum imports and receipts to the government, the banking sector and other private corporate,” the statement said.