Sri Lanka holds rate, sees robust economic performance

January 26, 2015

By CentralBankNews.info
    Sri Lanka’s central bank maintained its key policy rates, including the Standing Deposit Facility Rate (SDFR) at 6.50 percent, saying the country’s economy is “expected to record a robust performance in the period ahead” with appropriate macroeconomic policies to boost domestic and foreign investor confidence.
    The Central Bank of Sri Lanka, which has kept rates steady since October 2013, also said inflation was expected to decline in the months ahead due to subdued demand and inflation expectations, the impact of further reductions in fuel prices in January, and the expected reduction of administered prices of other key commodities as part of the government’s ‘100-Day Programme.’
    Sri Lanka’s headline inflation rate rose to 2.1 percent in December from 1.5 percent the previous month while core inflation eased to 3.2 percent from 3.6 percent in November, continuing its recent path of remaining between 3 and 4 percent.
    The central bank, which targets inflation of 3-5 percent this year, attributed low inflation to contained demand pressures along with favorable supply side developments and downward revisions in domestic energy prices in the last few months of 2014.
    The new governor of the central bank, Arjuna Mahendran, assumed his duties on Monday, replacing Ajith Nivard Cabraal who resigned in January following the presidential elections.

    The Central Bank of Sri Lanka issued the following statement:

“Monetary Policy Review – January 2015
In December 2014, headline inflation on a year-on-year basis was at 2.1 per cent compared to 1.5 per cent in the previous month. Core inflation, which directly measures underlying price pressures, continued to remain between 3-4 per cent while decelerating to 3.2 per cent in December 2014 from 3.6 per cent in November. While low inflation is mainly attributable to contained demand pressure in the economy, it was also supported by favourable supply side developments, particularly the downward revisions in domestic energy prices in the last few months of 2014. Subdued demand pressure and inflation expectations in the economy, the favourable impact of further reductions in fuel prices in January 2015, and the expected reduction of administered prices of other key commodities announced in the Government’s ‘100–Day Programme’ are expected to reduce inflation further in the months ahead.

Supported by historically low market interest rates in nominal terms, credit obtained by the private sector from commercial banks continued to expand at a healthy pace. Credit flows to the private sector increased by 6.5 per cent on a year-on-year basis in November 2014, while in absolute terms, the increase was Rs. 57.8 billion during the month, bringing the cumulative credit flows to the private sector to Rs. 147.4 billion during January- November 2014. Credit granted against immovable property, plant and machinery, personal guarantees and promissory notes, and other securities as well as unsecured loans increased substantially in November 2014. It is expected that the increasing trend in private sector credit disbursements can be sustained throughout 2015 providing the necessary impetus to the growth momentum of the economy.
Looking at the real sector, the Sri Lankan economy grew by 7.7 per cent during the third quarter of 2014 supported by strong performance in the Industry and the Services sectors. The Industry sector, which posted a growth of 12.4 per cent in the first half of 2014, maintained its growth momentum in the third quarter recording an expansion of 12.6 per cent. The performance in the Industry sector was supported by the significant growth observed in the construction, manufacturing and mining and quarrying sub sectors. In the meantime, the Services sector grew by 7.0 per cent while the Agriculture sector, which was hampered by weather related disruptions, contracted by 2.0 per cent. With appropriate macroeconomic policies to boost domestic and foreign investor confidence, the Sri Lankan economy is expected to record a robust performance in the period ahead.
Taking the above developments in the economy into consideration, the Monetary Board at its meeting held on 26 January 2015, was of the view that the current monetary policy stance is appropriate, and accordingly, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank of Sri Lanka unchanged at 6.50 per cent and 8.00 per cent, respectively. Access to the Standing Deposit Facility (SDF) will remain rationalised.

The date for the release of the next regular statement on monetary policy would be announced in due course.”

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