Inflation records y-o-y decline

Headline inflation declined to 1.6 percent in October, recording a year-on-year (y-o-y) decline and the lowest since November 2009, the Central Bank stated in its recent release. It was 3.5 percent in the previous month.

Annual average headline inflation also declined to 3.8 percent from 4.2 percent. Meanwhile, core inflation (y-o-y) was at 3.6 percent in October compared to 3.7 percent in the previous month indicating well contained demand pressures on inflation.

It is expected that subdued commodity prices in the international market, the recent budget proposals such as reducing Value Added Tax (VAT) to 11 percent and stable inflation expectations would keep inflation at benign levels in the period ahead.

Broad money (M2b) grew by 12.8 percent (y-o-y) in September 2014 compared to 12.3 percent in the previous month reflecting the expansion in bank credit obtained by the private and public sectors. During the first nine months of the year, net credit to the government (NCG) from the banking sector increased by Rs. 87.3 billion while credit to public corporations declined by Rs. 1.2 billion.

Net foreign assets (NFA) of the banking sector increased by Rs. 225.9 billion.

A healthy growth of credit disbursements to the private sector by commercial banks was observed for the second consecutive month in September. Credit obtained by the private sector from commercial banks increased by Rs. 52.3 billion during September, following an increase of Rs. 47.7 billion in August.

On a y-o-y basis, this was an acceleration of credit to 4.6 percent in September 2014 from 2.6 percent in the previous month.

The quarterly survey of commercial banks' loans and advances to the private sector reflected substantial credit flows to the industry and the services sectors in the first three quarters of the year.

In the meantime, providing further impetus for a robust credit growth in the period ahead, the impact of the contraction in pawning advances on private sector credit growth following the decline in international gold prices appears to have gradually diminished in response to the policy measures introduced by the Central Bank.

The reduction in market interest rates, including those on medium and long term credit facilities, is also expected to reinforce a continued credit flow to the economy.

On the external front, the Sri Lanka rupee remained broadly stable supported by foreign currency inflows mainly on account of export earnings, tourism, remittances and other inflows to the banking sector.

Accordingly, the gross official reserves stood at an estimated US $8.8 billion, equivalent to 5.3 months of imports by end of October.

In this background, the Monetary Board on Monday decided that the present monetary policy stance of the Central Bank was appropriate.

Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank will remain unchanged at present levels of 6.50 percent and 8.00 percent. Access to the Standing Deposit Facility (SDF) will remain rationalised while OMO auctions will be conducted as necessary.

The Standing Deposit Facility Rate (SDFR) is 6.50%, the Standing Lending Facility Rate (SLFR) 8.00% and the Statutory Reserve Ratio (SRR) is 6.00%.