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Central Bank Governor Prof. W. D. Lakshman (left) with Senior Deputy Governor Dr. P. Nandalal Weerasinghe at the press conference yesterday – Pic by Ruwan Walpola
By Uditha Jayasinghe
The Central Bank yesterday joined the stimulus bandwagon, cutting policy rates hot on the heels of tax cuts and a debt relief package from the Government earlier on, as a further support to kick-start the economy.
Following the 2020’s first monetary policy review on Wednesday, the Monetary Board decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 6.50% and 7.50%, respectively.
The latest move is the third cut since the 21 April Easter Sunday tragedy, and signals market rates need to come down to the desired level.
The Central Bank said the cut was done with the aim of reducing interest rates faster and boosting sluggish growth to meet an ambitious growth target of 4% in 2020, insisting that the economy could be kept from overheating with the right policy mix.
Central Bank Governor Prof. W.D. Lakshman told reporters the Monetary Board, which met on Wednesday, focused on maintaining an accommodative policy stance in line with many developed and emerging markets around the world that were also concerned with a global growth slowdown that has been predicted by the International Monetary Fund (IMF) and others for 2020.
The Governor also acknowledged there were renewed uncertainties in global economic activity with the spread of the coronavirus, which has already posed some disruptions to the travel and tourism industry, and resulted in volatility in global markets. However, he insisted that it was too early to say whether the disease would have an impact on local growth projections.
“Domestic supply conditions are already gradually improving, and inflation continues to remain within the 4%-6% range, which is the target while core inflation has decelerated. Inflation expectations remain well-anchored. Growth has remained subdued with growth for 2019 likely to be around 2.6%,” he said.
“There has been notable improvement in the current account, despite disruptions faced in 2019. The exchange rate has remained stable, and external sector conditions will be monitored closely and managed with appropriate macro-prudential measures, fiscal and monetary measures.”
Even though inflation hit 6.2% in December, Prof. Lakshman emphasised that in their view this was a temporary situation created by disrupted supply and elevated demand due to the festive season, and not as a result of any overheating in the economy. Therefore, he insisted that reducing policy rates would not drive up inflation to unmanageable levels, and the Central Bank is confident it can maintain the 4%-6% range initially targeted by the Monetary Authority.
“There has been a notable increase in business confidence caused by political stability and targeted measures taken by authorities to manage demand. With these changes, growth is likely to start going up and we predict it will exceed 4% in 2020.”
“Credit to the private sector has also gradually expanded. Revival in business confidence and economic activity, fiscal measures, credit relief package and declining interest rates will result in the continued expansion of private sector credit. Although market lending rates are already on a declining path, there were several indicators that the decline was slowing down. The view of the Monetary Board was that lending rates should continue to decline and this was a key factor that supported the decision of the reduction in rates,” he added.
The Central Bank noted that the economy was expected to reach its full capacity over the medium term, benefitting from the low and stable inflation environment, a competitive exchange rate, low lending rates as well as improved consumer and investor sentiment.
In spite of short-term fluctuations, the near-term forecast suggests that inflation will hover below 5% in 2020, and stabilise between 4% and 6% thereafter, assisted by appropriate policy measures and underpinned by well-anchored inflation expectations.
The Central Bank said, supported by the accommodative Monetary Policy stance, year-on-year (y-o-y) growth of credit to the private sector picked up to 4.5% in December 2019 compared to 4.4% in November 2019. In absolute terms, credit expanded by Rs. 57.9 billion in December 2019 following an increase of Rs. 47.1 billion in November 2019.
The cumulative increase of credit was Rs. 249.7 billion in 2019, compared to Rs. 762.1 billion in 2018. M2b growth picked up to 7.0% (y-o-y) in December 2019 from 6.1% in November 2019. Net Credit to the Government (NCG) by the banking sector expanded by Rs. 250.4 billion in 2019 compared to the increase of Rs. 348.2 billion in 2018. Credit to State-Owned Enterprises (SOEs) increased by Rs. 62.6 billion in 2019 compared to the significant increase of Rs. 218.4 billion in 2018.
Going forward, the growth of money and credit aggregates is expected to accelerate with the envisaged continued decline in lending rates, the expected expansion in economic activity supported by fiscal stimulus, announced credit support package for Small and Medium Enterprises (SMEs) and improved investor sentiment.
The reduction in lending rates thus far, except for the Average Weighted Prime Lending Rate (AWPR), has been less than envisaged. Weekly AWPR declined by 12 bps to 9.62% as of 24 January 2020 from end-2019 while the AWLR and AWNLR declined by 6 bps and 7 bps to 13.59% and 12.80%, respectively, in December 2019 from the previous month.
A delegation of the International Monetary Fund (IMF) is currently in the country assessing the Government’s policy framework. Under the former Government, the $ 1.5 billion Extended Fund Facility (EFF) was extended following the Constitutional Crisis in 2018 and is expected to end in mid-2020. The Government earlier expressed interest in continuing its engagement with the IMF.
The Central Bank also said it had not decided when it may go to the market to issue sovereign bonds and was still awaiting directives from the Finance Ministry. The $ 500 million Samurai Bond that the Central Bank was preparing for ahead of the Presidential Election has also become stagnant with analysts expecting the Government to move forward with its plans to repay $ 4.8 billion after the General Elections. The next large debt repayment of $ 1 billion is only due in October 2020 and the Central Bank earlier said it has sufficient reserves to meet payments until at least the middle of the year. Reserves were at about $ 7.6 billion in November.
