Wednesday Nov 13, 2024
Wednesday Nov 13, 2024
Friday, 20 May 2022 02:15 - - {{hitsCtrl.values.hits}}
The Central Bank yesterday announced policy rates will be kept unchanged following the Monetary Board review on Wednesday, as market rates have risen sharply.
It said the move follows after careful consideration of the current and expected macroeconomic developments on both domestic and global fronts.
“We see that the monetary policy tightening and the exchange rate depreciation is transmitting into the economy.
However, to curtail the cost push and supply side issues need to be addressed separately,” the Central Bank Governor Dr. Nandalal Weerasinghe told journalists at the post-Monetary Policy Review meeting media briefing yesterday.
Although inflation is projected to remain elevated in the near term combined with the other measures to stem the firming up of aggregated demand pressures, the Central Bank said it expects to contain any further build-up of inflation expectations and ease inflationary pressures in the period ahead.
“The interest rates on deposit and lending products of financial institutions have adjusted upwards considerably, correcting some anomalies that prevailed in the market interest rate structure,” it said.
The Central Bank said domestic credit in rupee terms recorded a significant expansion in March, mainly due to the valuation impact of foreign currency denominated loans, the parity adjusted domestic credit expansion is estimated to have slowed.
It also said that the resultant expansion of broad money growth has been weighed down by the contraction in net foreign assets (NFA) of the banking system. It is envisaged that the elevated interest rate structure would attract more deposits into the banking system.
“However, the expansion of domestic credit, particularly to the private sector, would remain restrained due to the pass-through of the significantly tight monetary policy measures,” the CBSL said.
It said the yields on Government securities, which increased considerably in the recent past, are expected to moderate and stabilise at lower levels in the period ahead with the necessary fiscal adjustments together with renewed efforts to restore political stability in the country.
“The interest rates in our view have gone too far and that’s where we need some intervention,” Dr. Weerasinghe pointed out.
The Central Bank is projecting the inflation to remain elevated in the coming months before moderating thereafter, supported by the realisation of the full impact of the policy measures.
“We expect the headline inflation to go from 30% to 40% within next month, not necessarily due to demand driven — but partly due to price adjustments, economic crisis and historical excess demand,” Dr. Weerasinghe explained.
However, he believes the inflation will moderate reflecting on corrective policy measures of the Central Bank and the expected improvements in both domestic and global supply conditions.
The Central Bank projects the recent tightening policy rates and the strengthening of monetary policy communication will help anchor inflation expectations of the public in the period ahead.
The post May monetary policy review statement also noted that the economic growth is expected to record a setback this year.
“Economic activity is expected to be affected considerably by the ongoing supply shortages, energy-related issues, and social tensions, as reflected by several leading indicators. Demand management policies of the Central Bank and anticipated fiscal consolidation measures are also expected to keep aggregate demand subdued during the year,” it added.
It also said that the global economic growth is also expected to moderate in response to the tightening of monetary policy by the Central Banks globally to counter inflationary pressures along with the spill over effects of the geopolitical tensions in Eastern Europe.
Noting that the external sector continues to face heightened challenges, the Central Banks assured that those were being addressed by an array of measures.
“The guidance provided by the Central Bank to all licensed banks in the determination of the interbank spot exchange rate, since mid-May 2022, is expected to minimise any excessive volatility in the domestic foreign exchange market. This, coupled with the recent tightening of the monetary policy stance, restrictions on imports on open account terms, and the reduction in the proportion of mandatory foreign exchange sales by the banks to the Central Bank, is expected to ease pressures on the Sri Lanka rupee, while also gradually improving liquidity in the domestic foreign exchange market,” it added.
Dr. Weerasinghe said he was happy to see that market is responding well. “The banks, exporters and importers are following the guidelines,” he added. The Monetary Board expects these measures to help mobilise foreign exchange to finance essential imports, until sizeable bridging finance is made available.
“Some recovery in foreign exchange inflows in terms of workers’ remittances is expected due to the notable reduction in the gap between the official exchange rate and the rate offered by the grey market and the continued increase in migration of workers,” the CBSL said.
However, the near-term outlook of the tourism sector is likely to remain unfavourable due to both global and domestic factors.
The Central Bank said the gross official reserves as of end April were provisionally estimated at $ 1.8 billion, including the swap facility from the People’s Bank of China equivalent to around $ 1.5 billion, which is subject to conditions on usability.
The Central Bank and the Government have commenced technical level discussions with the International Monetary Fund (IMF) aimed at working towards a program to address the macroeconomic challenges faced by the economy, while expeditious arrangements are being made to commence the external debt restructuring process.
It also added that the negotiations have already begun with bilateral and multilateral partners to obtain bridging finance in order to secure foreign exchange required to finance imports of essential goods and strengthen the social safety net programs.
