Inflation down in December
Broad money supply (M2b) continued to expand at a high rate with
year-on-year growth of 17.2 percent in November 2015, following the
growth of 17.0 percent in the previous month. In November 2015, the net
foreign assets (NFA) of the banking sector improved with the receipt of
the proceeds of the International Sovereign Bond (ISB) of US dollars 1.5
billion issued on October 27, 2015.
The issuance of the ISB also facilitated a reduction of net credit
obtained by the government (NCG) from the banking sector during
November, while credit obtained by public corporations also declined.
Credit extended to the private sector by commercial banks remained the
key driver of broad money growth, recording an increase of 27.0 percent
(year-on-year) in November 2015, compared to the growth of 26.3 percent
In absolute terms, the monthly increase in private sector credit was
Rs. 91.2 billion, leading to a cumulative expansion in private sector
credit of Rs. 647.7 billion during the first eleven months of 2015.
To arrest the possible build-up of demand pressures on inflation
through excessive credit creation, the Central Bank increased the
Statutory Reserve Ratio (SRR) applicable on all rupee deposit
liabilities of commercial banks by 1.50 percentage points to 7.50
percent from January 16, 2016. Accordingly, excess rupee liquidity in
the domestic money market, which averaged around Rs. 90 billion in
December 2015 and in the first two weeks of January 2016, declined to
around Rs. 42 billion, on average, thereafter.
The increase in SRR also induced an upward adjustment in market
interest rates, and the growth of credit extended to the private sector
by commercial banks is expected to decelerate in the period ahead,
albeit with a time lag.
In spite of the high growth of broad money, inflation remained
subdued supported by low international commodity prices and broadly
favourable domestic supply conditions.
The Colombo Consumers' Price Index (CCPI, 2006/2007=100) based
headline inflation decelerated to 2.8 percent, on a year-on-year basis,
in December 2015 from 3.1 percent in November 2015, and annual average
headline inflation was 0.9 percent.
Headline inflation based on the National Consumer Price Index (NCPI,
2013=100) decelerated to 4.2 percent, on a year-on-year basis, in
December 2015 from 4.8 percent in the previous month, and registered a
value of 3.8 percent on an annual average basis.
The CCPI based core inflation edged up in December 2015, recording
4.5 percent, on a year-on-year basis, in comparison to 4.3 percent in
the previous month.
On the external front, export earnings contracted by 9.3 percent in
November 2015 causing a cumulative decline of 4.4 percent during the
first eleven months of the year. Import expenditure also recorded a
decline of 11 percent in November 2015, and the cumulative decline in
expenditure on imports was 2.1 percent during the first eleven months of
Reflecting these developments, the deficit in the trade account
narrowed for the fifth consecutive month in November 2015.
Nevertheless, on a cumulative basis, the trade deficit expanded
marginally by 1.0 percent to US dollars 7,566 million during the first
eleven months of the year. Earnings from tourism are estimated to have
increased by 17.8 percent during 2015, although workers' remittances
declined by 0.5 percent during the year, mainly reflecting a decline of
receipts from the Middle East.
Gross official reserves were estimated at US dollars 7.3 billion by
end 2015, while the Sri Lanka rupee, which depreciated by 9.0 percent
against the US dollar in 2015, recorded a marginal appreciation thus far
The Monetary Board will maintain the Standing Deposit Facility Rate (SDFR)
and the Standing Lending Facility Rate (SLFR) of the Central Bank
unchanged at 6.00 percent and 7.50 percent.