SL Central Bank increases interest rates, first time in many months***

Sri Lanka's Central Bank (CB)  on Thursday announced an increase in trend-setting interest rates, the first time the rates have changed in several months.

The CB's decision was taken at a meeting of the Monetary Board chaired by Dr. Indrajith Coomaraswamy, his first meeting of the board after being appointed Governor earlier this month.

"Taking into consideration the developments discussed above, the Monetary Board, at its meeting held on 28 July 2016, was of the view that further tightening of monetary policy is required to curb excessive demand in order to pre-empt the escalation of inflationary pressures and to support the balance of payments. Accordingly, the Monetary Board decided to increase the main policy interest rates of the Central Bank, namely, the Standing Deposit Facility Rate (SDFR) and
the Standing Lending Facility Rate (SLFR), by 50 basis points each, to 7.00 per cent and 8.50 per cent, respectively, effective from the close of business on 28 July 2016. The Board is of the view that tightening of monetary policy in a forward looking manner will ensure the maintenance of inflation at mid-single digits in the medium term, which is supportive of the growth momentum in the economy. As such, the current policy adjustment is not expected to have a significant impact on the long end of the yield curve. The Central Bank will continue to monitor macroeconomic
developments closely and make appropriate adjustments to the monetary policy stance, as necessary," the announcement posted on the CB web said. 

The policy rates are a general quideline for banks to either increase (when the rates are up) or decrease (when the CB drops rates). Analysts said that there has been concern over an increase in spending and loan disbursements affecting inflation.

The statement added: "Although some deceleration in the growth of broad money (M2b) supply was observed in the month of May 2016, monetary expansion remained above the desired levels. In spite of the increase in market interest rates, credit granted to the private sector by commercial banks increased at the high pace of 28.0 per cent, year-on-year, in May 2016, in comparison to 28.1 per cent in April 2016. Provisional data also indicates that the high growth of credit to the private sector has continued during the month of June as well. The continued appetite for bank credit by the private sector in spite of the upward movement in market interest rates could create excessive demand and high inflation in the economy in future." - ENDS -