CB cuts policy rates
The Central Bank (CB) cut the Repurchase rate and the Reverse
Repurchase rate by 50 basis points to 7.0 and 9.0 percent and the
monthly monetory policy review said that the policy decision aims at
boosting credit and private investments. In addition, the reserve
maintenance period of commercial banks will also be increased to two
weeks from one week from June 1, 2013 to offer greater flexibility to
commercial banks in managing liquidity, while maintaining the Statutory
Reserve Ratio at the current level of 8 percent.
This decision has been taken amidst warnings on inflation by the
International Monetary Fund the previous week. CB sources said that
inflationary pressures were in check.“Inflation has remained within
single digit levels over the past 51 months, declining to 6.4 percent,
on a year-on-year basis, in April 2013.While the proposed electricity
tariff adjustment will result in a modest increase in the Colombo
Consumers’ Price Index (CCPI), it is anticipated that the increase will
not lead to inflation rising above the single digit level.
At the same time, international commodity prices have softened in
recent times, indicating that general price levels would remain
favourable in the period ahead.
Furthermore, the sharp deceleration in monetary expansion in 2012, as
reflected by the decline in year-on-year core inflation to 6.1 percent
in April, is expected to keep demand driven pressures in check, which
augurs well for future inflation,” the report said.
In the previous week the IMF stressed that monitory policy should
remain unchanged and should target low inflation. Responding recent
remarks of the Central Bank (CB) governor Ajith Nivard Cabraal on the
possibility of relaxing monitory policy, IMF Resident Representative,
Koshy Mathai said “We recommend holding policy rates at current levels,
at least until inflation eases.
It is difficult to say how long a tight monetary policy should be
maintained. So, the Central Bank will have to respond as the situation
develops but we expect policy rates to remain as it is for the rest of
the year”. The CB has a different view of the country's economy and the
report said that there is now a growing need to enhance domestic demand
and thereby provide greater stimulus to the domestic economy.
“The economy displayed a commendable performance in 2012 by recording
a growth of 6.4 percent in the face of significant external and domestic
challenges. However, real sector leading indicators show some moderation
in economic activity in the first quarter of 2013, largely on account of
the slow-down in net external demand,” the report said.
“The slow recovery in external demand has posed some downward risks
for Sri Lanka’s exports, although higher receipts from export of
services, such as tourism, personal services and IT related activities
are likely to adequately cushion the possible fall in merchandise
exports. In the meantime, subdued factory and industry output and lower
external trade are the key areas affected by the slow global economic
recovery, and hence, there is now a growing need to enhance domestic
demand and thereby provide greater stimulus to the domestic economy,” it