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 said.