2013 monetary policy is towards easing: CB Chief

Reuters: Sri Lanka’s 2013 monetary policies will be weighted more towards loosening after the success of tightening in turning around a trade deficit this year, Central Bank Governor Ajith Nivard Cabraal said on Tuesday.

Since February, Sri Lanka has raised key policy rates twice, allowed rupee exchange rate flexibility, and imposed a credit ceiling after a record trade deficit that resulted in a negative balance of payments gap last year.

“Certainly it (monetary policy) would be more weighted towards loosening than tightening,” Cabraal told Reuters in an interview.

The Central Bank Head said the policy measures have already helped to turn around the trade deficit, which has narrowed 1% in the first 10 months of this year, and slowed the year-on-year current account gap.

The policy measures, however, have hit the economic growth which has been revised down to 6.8% from the original 8% and fueled inflationary pressure due to a more than 14% depreciation in the rupee after it was floated in February.

Key monetary policy rates are already at three year highs, while the Government’s 364-day T-bill yield has risen 355 basis points so far this year.

“(It’s) not necessarily we should do that,” Cabraal said when asked if the Central Bank is considering cutting policy rates any time soon. Certainly, next year may not be as tight as this year. We will keep a close tab on inflation.”

Annual inflation hit a 42-month high in July due to the sharp rupee depreciation and supply shortages after an extended drought hit the farm sector. In November, it reversed an easing trend to hit a three-month high of 9.5% year-on-year from 8.9% a month earlier.

“Inflation in 2013 should be reasonably benign, because the base also has risen this year,” Cabraal said. “So inflation should be at a reasonable level next year. We are looking at mid single digits.”

The rupee has appreciated 3.7% since it hit a record low of 133.60 on 28 June this year. Both the Central Bank and the Finance Ministry have said it should rise to 125 against the US dollar based on economic fundamentals.

“Exchange rate seems to be tightening to a reasonable degree,” Cabraal said. “I think it is heading the way we had predicted.”