Central Bank maintains interest rates at current levels

Contrary to expectations in some quarters, the Monetary Board of the Central Bank (CB) didn’t increase policy interest rates on Tuesday.

With the US dollar rising sharply against the Rupee and an outflow of dollars from Treasury bond sales, there was some expectation that the CB might interest interest rates to make it more attractive than US interest rates, one of the reasons why foreign funds managers were pulling out their funds.

The Board at its meeting held on Monday, decided to maintain policy interest rates at their current levels. Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the CB will remain at 7.25 per cent and 8.50 per cent, respectively, the banking regulator said in a public announcement.
“The Board arrived at the above decision after carefully considering current and expected developments in the domestic and global economy, with the aim of stabilising inflation at mid-single digit levels in the medium term to support growth,” it said.

The statement said:
“The broad based strengthening of the US dollar subsequent to the increase in policy interest rates by the Federal Reserve and expectations of further interest rate hikes have exerted pressure on emerging market economies (EMEs). In response, EMEs with significant pressure on local currencies have tightened their monetary policy stance by raising policy interest rates. Meanwhile, the recent upward trend observed in international oil prices is likely to exacerbate challenges faced by the global economy.”

“The deficit in the trade account continued to expand during the first seven months as import growth outpaced export growth. The substantial surge in import expenditure was driven by the growth in imports of fuel, gold and personal motor vehicles. Even though services related inflows such as tourism performed notably and the financial account of the Balance of Payments (BOP) strengthened during the year, outflows of foreign investment from the government securities market exerted pressure on the BOP. High import growth and capital outflows, in the context of a strengthening US dollar, exerted significant pressure on the exchange rate. Accordingly, in line with several other peer countries such as India, Philippines and Indonesia, the Sri Lankan rupee depreciated at a faster pace of 9.7 per cent against the US dollar during the year up to October 1, 2018. In addition to the Central Bank intervention to curtail disorderly adjustment in the exchange rate during the first few weeks of September 2018, both the Central Bank and the government introduced a raft of policy measures including margin deposit requirements for letters of credit opened for the importation of personal motor vehicles, cash margins on selected non-essential consumer goods imports and the suspension of concessionary vehicle permits for a limited period. These measures are expected to ease the excessive demand for foreign currency and hence the pressure in the domestic foreign exchange market as already observed in the stabilising exchange rate.” – ENDS -