Policy interest rates remain unchanged
The Monetary Board of the Central Bank (CB) last week decided to
maintain policy interest rates without change considering macroeconomic
developments.
 Accordingly, the Standing Deposit Facility Rate (SDFR) and the
Standing Lending Facility Rate (SLFR) of the Central Bank will remain at
the present levels of 6.50 percent and 8.00 percent.
Access to the Standing Deposit Facility (SDF) will remain
rationalised with deposits of OMO participants under the SDF window
exceeding three times being accepted at the lower rate of 5.00 percent
until further notice.
In the meantime, OMO auctions will be conducted when necessary, CB
sources said.
The monthly monetary policy review report issued by the CB said that
continuing low inflation environment continued for the 68th consecutive
month.
Headline inflation on a year-on-year (Y-o-Y) basis remained unchanged
at 3.5 percent in September 2014 while declining on an annual average
basis to 4.2 percent from 4.5 percent in the previous month.
Core inflation (Y-o-Y) meanwhile, decelerated to 3.7 percent in
September from 3.9 percent in August.
The significant reduction of international energy prices and the
improvements in the domestic electricity infrastructure have enabled the
government to reduce domestic energy prices, and the benefits of these
adjustments have now begun to reflect favourably on inflation.
This development, along with the continued deceleration of the prices
of other key commodities in the international market, is likely to
result in inflation remaining at a lower rate than the previously
projected range of 4-5 percent in the period ahead.
Following some initial volatility observed in the domestic money
market in response to the monetary policy measures taken by the Central
Bank in September, short-term money market rates have broadly stabilised
while longer-term lending rates are adjusting downwards as
expected.Credit extended to the private sector by commercial banks
increased by Rs. 47.7 billion during August, indicating a turnaround in
the behaviour of bank credit.
It is expected that credit disbursements to the private sector from
commercial banks would continue to grow given the continued growth in
economic activity and the relatively low market interest rates. In
nominal terms, most market interest rates are at historic lows, although
there is further room for these rates to reduce in relation to the low
inflation environment.
Meanwhile, net credit to the government (NCG) from the banking sector
has increased by Rs. 60.9 billion in the first eight months compared to
the projected bank borrowing of Rs. 100 billion for the year, and credit
to public corporations has declined by Rs. 27.2 billion.
Reflecting increased foreign inflows to the government and the
private sector, net foreign assets (NFA) of the banking sector have
increased by Rs. 289 billion during the first eight months of the year.
Accordingly, the growth of broad money (M2b), which moderated in July
2014 to 11.9 percent (y-o-y), accelerated to 12.3 percent (y-o-y) in
August 2014. So far during the year, the Sri Lankan rupee has
appreciated against the US dollar by 0.14 percent and gross official
reserves stood an estimated US $ 8.7 billion by October 13.
The strong external reserve position is the result of continued
foreign exchange inflow from increased export of goods and services,
remittances, and other inflow to the private sector and the government. |
