Central Bank to maintain current interest rates

Current interest rates will continue, contrary to expectations that the Central Bank would on Wednesday further reduce rates, a policy seen in recent months.
 
The Monetary Board of the Central Bank (CB) of Sri Lanka, at its meeting held Wednesday, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the CB at their current levels of 4.50 per cent and 5.50 per cent, respectively, according to a media release issued by the CB on Thursday. On earlier occasions, the CB had reduced rates in a bid to stimulate the market and encourage borrowings.

“The Board recognised the necessity to continue the accommodative monetary policy stance, particularly as market lending rates are yet to reflect the full pass through of policy easing measures implemented thus far. The Board decided to adopt targeted measures to reduce specific interest rates that it considered to be excessive, which would help marginal borrowers. The Board anticipates a further reduction in overall market lending rates, thereby encouraging borrowing for productive economic activity and reinforcing support for COVID- 19 hit businesses as well as the broader economy, given the conditions of subdued inflation,” the release said. 

Domestic economic activities, which were adversely affected by the COVID-19 pandemic, are expected to recover in the second half of 2020, the CB said.

As per the provisional estimates released by the Department of Census and Statistics (DCS), the Sri Lankan economy contracted by 1.6 per cent in the first quarter of 2020, contrary to the expectations of the CB. As per the available indicators, the adverse impact of COVID-19 on economic activity during the second quarter of 2020 is likely to be substantial. However, a faster rebound of economic activity is expected, especially in the fourth quarter of 2020, supported by improved political stability, the resultant improvement in business confidence, and the lagged impact of monetary and fiscal stimulus. This expected rebound in the fourth quarter is essential for the country to record a positive growth rate during this year. The enhanced focus on domestic production for import substitution as well as to export is expected to drive near term growth, with potentially significant implications on the longer horizon. Sustaining the growth momentum beyond the near term would require reforms to address structural issues in the economy, the CB said. 

“The external sector continued to demonstrate resilience, reflecting the impact of prudent measures implemented amidst the COVID-19 outbreak. The trade deficit has narrowed during the first half of 2020, as the contraction of imports outpaced the contraction of exports, supported by import restrictions and subdued global petroleum prices. Some improvement in workers’ remittances was observed in June, in contrast to the declining trend observed since March 2020. However, the tourism sector, which has been forced to rely on domestic tourism for its survival in the face of the pandemic, is poised to witness a sizable decline in foreign exchange earnings in 2020. Depreciation of the Sri Lankan rupee against the US dollar has been limited to 1.3 per cent thus far during the year, following a significant depreciation recorded during March-April 2020. With the CB buttressing its reserves through foreign currency purchases from the market and foreign currency swaps with the Reserve Bank of India and licensed banks, gross official reserves were estimated at US$ 7.1 billion by end July 2020, providing an import cover of 4.7 months,” it said. (BS)