CB says all merry in December review

The Central Bank yesterday left policy rates unchanged for the eleventh ninth consecutive month, suggesting that all things are fine following the year-end December review.

The move was also mostly in line with expectations as 11 analysts out of 15 polled by Reuters predicted  on Thursday that rates will be kept unchanged.

It said that inflation was seen moderating over the second half of this year. Following a further decline in the year-on-year inflation measured in terms of the CCPI (2006/07=100) to 4.7%, annual average inflation was 6.9% by November 2011.

Year-on-year core inflation meanwhile was 4.9% by November 2011, while on an annual average basis, core inflation was 7.2%.

While supply side improvements, particularly with respect to agricultural produce, have helped bring down domestic prices, the expected favourable performance of the domestic agricultural sector in the forthcoming year coupled with the ongoing improvements to infrastructure including transportation, will help mute inflationary pressures in the period ahead.

In the global economy, sovereign debt related issues in several advanced economies have led to uncertainty in financial markets and volatility in international commodity prices.

Meanwhile, oil prices continue to remain high with some volatility due to supply constraints following recent geo-political tensions and perceived risks to supplies.

Reflecting the impact of these developments as well as import demand associated with the robust expansion of domestic economic activity, the deficit in the trade balance of the balance of payments was seen widening over 2011.

Nevertheless, the Central Bank said the following circumstances are expected to help cushion the balance of payments in 2011.

(a) Continued increases in inflows to the services account, particularly with respect to tourism;

(b) Higher inward remittances;

(c) Inflows to the financial account including long-term debt obtained by the government in relation to development projects;

(d) Foreign direct investment, which is estimated to have exceeded the targeted level of US$ 1 b in 2011;

(e) Inflows to commercial banks which would help strengthen their capital base, and

(f) Inflows on account of short-term financing obtained by commercial banks. Going forward, banks are also likely to secure more funds from abroad as Tier II capital of banks could potentially increase by a further US$ 1 billion.

With respect to monetary developments, broad money (M2b) growth was seen moderating in October 2011 to 19.8%, along with a deceleration in the growth of credit obtained by the private sector.

This trend is expected to continue in the months ahead as the increases in domestic market interest rates seen in recent weeks as well as the widely expected slowing down of the global economy are likely to have a dampening effect on credit growth and therefore monetary expansion.

Having taken into consideration the recent macroeconomic developments, the Monetary Board at its meeting held yesterday, decided to maintain the bank’s policy interest rates at their current levels. Accordingly, the bank’s repurchase rate remains at 7.00% while the reverse repurchase rate remains at 8.50%.

The release of the next regular statement on monetary policy will be on 13 January 2012.