Central Bank retains interest rates amidst speculation of a hike

Sri Lanka’s Central Bank (CB) on Tuesday kept interest rates unchanged contrary to expectations by the money market of a possible hike to stem inflation.

The announcement came just as the Central Bank Governor Arjuna Mahendran was preparing to meet journalists at his Colombo headquarters to announce the month's monetary policy, in addition to revealing highlights of the bank's annual report for 2015. Some journalists walked out after waiting for 45 minutes as the briefing had not started since the Governor was attending another board meeting. 

“Considering the fact that the Central Bank has already adopted measures to tighten monetary policy by raising the Statutory Reserve Ratio (SRR) and policy interest rates, and that the impact of these measures is yet to be reflected in monetary conditions in full, the Monetary Board, at its meeting held on April 26, was of the view that the current monetary policy stance is appropriate and decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.50 per cent and 8 per cent, respectively,” the bank said in a statement. 

The statement said that headline inflation, as measured by the Colombo Consumers’ Price Index declined to 2 per cent on a year-on-year basis in March 2016 from 2.7 per cent in February 2016, mainly due to the decline in food inflation. On an annual average basis, CCPI based headline inflation edged up to 1.1 per cent in March 2016 from 0.9 per cent in the previous month. Year-on-year headline inflation was 2.2 per cent in March 2016 compared to 1.7 per cent in the previous month, and was 2.4 per cent on an annual average basis.

Credit granted to the private sector by commercial banks increased by 26.5 per cent in February 2016, on a year-on-year basis, compared to 25.7 per cent in January 2016, while in absolute terms, credit granted to the private sector grew by Rs. 53.7 billion during the month of February 2016.

Meanwhile, market interest rates have risen reflecting the tight monetary conditions in the economy. Going forward, a gradual slowdown in money and credit expansion is expected in the period ahead, as the recent monetary policy measures are expected to have an impact on the economy with some time lag.

“On the external sector, the decline in expenditure on imports in February 2016 has been greater than the decline in earnings from exports, thereby narrowing the deficit in the trade account by 11.7 per cent, year-on-year. Earnings from tourism are estimated to have increased by 22.8 per cent in March 2016, while workers’ remittances recorded a healthy increase of 8.3 per cent in February 2016. Gross official reserves are estimated to have stood at US$ 6.2 billion by end March 2016 compared to $ 6.6 billion at end February 2016, and the Sri Lanka rupee remained broadly unchanged against the US dollar thus far during 2016. - ENDS -