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Reacting to higher inflation and currency depreciation the Central Bank yesterday increased bank reserve ratios by 1.50 points to 7.50% to reduce liquidity though it stopped short of changing key policy rates as widely expected.
The Monetary Board decided at its meeting held on 30 December, to raise the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50% to be effective from the reserve week commencing 16 January 2016, the Central Bank said in a statement. This increase is the first since April 2011.
Furthermore, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.00% and 7.50%, respectively. A Reuters poll had predicted rates would be raised by 25 bps.
“The year-on-year growth of broad money (M2b) continued to expand at a high rate of 17.0%n October 2015 compared to 16.0% recorded in the previous month, driven by theexpansion of credit extended to both private and public sectors by the banking system. Amongst contributory factors, credit granted to the private sector by commercial banks increased by 26.3 percent, year-on-year, compared to 22.2% in the previous month. Tentative data for November2015 also shows that credit flows to the private sector continue to expand at a high rate,” it noted.
Meanwhile, excess liquidity in the domestic money market continues to remain high, fuelling monetary expansion.
Headline inflation, as measured by the Colombo Consumers’ Price Index(CCPI, 2006/2007=100), increased to 3.1%, on a year-on-year basis, in November 2015 from1.7% in October 2015. On an annual average basis, headline inflation increased to 0.9 percent in November 2015 compared to 0.7% in the previous month. Following a similar trend,headline inflation based on the National Consumer Price Index (NCPI, 2013=100) also increased to 4.8%, on a year-on-year basis, in November 2015 from 3.0% in October 2015.
Reflecting the firming up of aggregate demand conditions in the economy, the CCPI-based core inflation rate registered 4.3%, on a year-on-year basis, in November 2015 vs. 4.4% in the previous month and compared to its recent low of 0.8% in February 2015. Meanwhile,core inflation measures, based on NCPI, also suggest rising underlying inflationary pressures in theeconomy.
On the external front, the decline in expenditure on imports in October 2015 was greater than the decline in earnings from exports, narrowing the deficit in the trade account by 6.8%,on a year-on-year basis, to US dollars 791 million. However, on a cumulative basis, the tradedeficit during the first ten months of the year widened by 2.5% to US dollars 6,936 million reflecting the continued increase in non-oil imports.
Meanwhile, earnings from tourism during the first eleven months of 2015 are estimated to have grown by 18.1%, while workers’remittances grew marginally by 0.8% in the first eleven months of the year. Gross official reserves, which stood at US dollars 6.5 billion at end October 2015, are estimated to have increased to around US dollars 7.3 billion by end November 2015. Reflecting domestic and global developments, the Sri Lanka rupee has depreciated by 8.8% against the US dollar in 2015. Notwithstanding these developments, the Monetary Board is of the view that external sector policies already implemented need to be further supported by some monetary policy tightening.
“If the current excess liquidity in the domestic money market continues to remain high for an extended period, it could lead to an undue expansion in monetary aggregates, fuelling future inflation in the economy. In that respect, the Monetary Board is of the view that it is appropriate to restrain the build-up of demand-side pressure on inflation to ensure continued monetary and price stability,” the Central Bank said.
Reuters: Sri Lankan shares ended firmer at more than one-week high on Wednesday, led by financials, but trading was ahead of the Central Bank’s key monetary policy rate decision later in the day.
The main stock index rose 0.33% to finish 6,870.63, its highest close since 21 December.
“The market is waiting for clear direction on the interest rates and many investors are still on holiday,” a stockbroker said asking not to be named.
Sri Lanka’s Central Bank is expected to raise interest rates by 25 basis points from record lows at its December policy meeting on Wednesday, a Reuters poll found, a move that could relieve pressure on the fragile rupee. The Central Bank’s policy decision is due at 1400 GMT.
Stockbrokers expect some investors to shift to fixed and risk free assets from stocks in the event of a rate hike.
Foreign investors sold a net 31.6 million rupees ($219,292) worth of equities, extending the net outflow to 4.45 billion rupees so far in the year.
Turnover stood at 271.2 million rupees, around a quarter of this year’s daily average of 1.06 billion rupees.
Commercial Leasing and Finance Plc rose 5%, while Lanka Orix Leasing Co Plc gained 2.5%.
Top lender Commercial Bank of Ceylon, which saw net selling by foreign investors, ended flat, but accounted for around a third of the day’s turnover.
Reuters: The Sri Lankan rupee ended lower after touching a record low of 144.25 in intraday trade on Wednesday as speculation that the currency would weaken further weighed ahead of the Central Bank’s rate decision later in the day.
The Sri Lankan Central Bank’s monetary policy announcement is scheduled for 1400 GMT, with most analysts expecting a 25-basis-point increase in the key lending and deposit rates.
The rupee finished 0.2% lower at 144.20/30 per dollar, a new closing low and down from Tuesday’s 143.95/144.05.
The currency breached its previous record low of 143.95 hit on Tuesday.
“The lowest deal was done at 144.25. No sensible exporter or investor will convert dollars when there are signs of the Central Bank not raising the policy rates contrary to market expectations,” a currency dealer said, asking not to be named.
Six out of 11 economists polled by Reuters expect the Central Bank to raise interest rates by 25 basis points from record lows, a move that could relieve pressure on the fragile rupee.
“The rejection of all t-bond deals was a signal that it is not ready to allow the interest rates to go up. This means the entire pressure is going to be on the rupee and it is likely to depreciate further if there is no rate hike,” the currency dealer said.
The Central Bank rejected all bids, worth Rs. 33.06 billion ($229.42 million), at a t-bond auction on Tuesday after planning to raise Rs. 13 billion through the sale of 46-month, 70-month, and 152-month t-bonds.
The currency has fallen 6.6% since the Central Bank allowed free float of the rupee on 4 September, and is expected to weaken further in 2016 due to lower reserves and higher imports, currency dealers say.
It is down 9% so far in the year.
Economists say the government’s loose monetary and fiscal policies have contributed to the steep fall in the currency.
Commercial banks parked Rs. 83.5 billion ($579.46 million) of surplus liquidity on Wednesday using the Central Bank’s deposit facility at 6%, while they borrowed Rs. 150 million using the Central Bank’s lending facility at 7.5%, official data showed.
