CB doesn’t hike interest rates but tightens credit demand
View(s):The Central Bank (CB) on Wednesday didn’t hike policy interest rates as widely expected but reduced the amounts commercial banks will have on a daily basis to lend in the market.The CB’s Monetary Board, after its December 30 meeting, decided to raise the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50 per cent effective from January 16. “Furthermore, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.00 per cent and 7.50 per cent, respectively,” the CB statement on Wednesday night said.
“If the current excess liquidity in the domestic money market continues to remain high for an extended period, it could lead to an undue expansion in monetary aggregates, fuelling future inflation in the economy. In that respect, the Monetary Board is of the view that it is appropriate to restrain the build-up of demand-side pressure on inflation to ensure continued monetary and price stability,” it said. Colombo banking sector had expected a marginal hike in interest rates in line with US interest rates in early December going up for the first time in several years.
The CB report said that year-on-year growth of broad money (M2b) continued to expand at a high rate of 17 per cent in October 2015 compared to 16 per cent recorded in the previous month, driven by the expansion of credit extended to both private and public sectors by the banking system. Amongst contributory factors, credit granted to the private sector by commercial banks increased by 26.3 per cent, year-on-year, compared to 22.2 per cent in the previous month.“Tentative data for November 2015 also shows that credit flows to the private sector continue to expand at a high rate,” it said.
On the external front, the decline in expenditure on imports in October 2015 was greater than the decline in earnings from exports, narrowing the deficit in the trade account by 6.8 per cent, on a year-on-year basis, to US$791 million. However, on a cumulative basis, the trade deficit during the first 10 months of the year widened by 2.5 per cent to $6,936 million reflecting the continued increase in non-oil imports. The CB said the Sri Lanka rupee has depreciated by 8.8 per cent against the US dollar so far in 2015.