Confidence on inflation, credit growth lets Central Bank keep policy rate intact

Confidence on the level of inflation and credit growth has encouraged the Central Bank to keep policy rates unchanged at its first monetary policy review for the New Year.

It said broad money growth continued to moderate owing to the slowdown in credit extended to the private sector, which has been decelerating steadily since implementing several policy measures in early 2012.

Private sector credit growth declined to 20.7% by November from the peak growth of 35.2% recorded in March 2012. Net credit obtained by the Government, which increased up to November, declined substantially during the month of December as a result of conscious efforts by the Government to meet the fiscal targets. Credit obtained by public corporations however, continued to grow, exerting some pressure on broad money growth.

In the external sector, with the sharp deceleration of the growth in expenditure on imports, the cumulative trade deficit for the first eleven months of 2012 declined by 2.1% from the corresponding period in 2011. With increased net earnings from trade in services, workers’ remittances, and investment inflows, the Balance of Payments (BOP) recorded a surplus in 2012, which was reflected in the increase in the Gross Official Reserves of the country.

Inflation, which continued to increase from February to July 2012 largely due to the adjustments of administered prices, eased in December declining to 9.2% on a year-on-year basis from 9.5% in November. Effective demand management policies that were in place in 2012 are likely to have moderated aggregate demand sufficiently, reining in future inflation and inflation expectations.

As a result, inflation is projected to moderate from March 2013 and reach mid-single digit levels thereafter. Meanwhile, credit extended to the private sector by commercial banks is targeted to grow at a rate of around 18.5% in 2013, and towards this end, credit disbursements by banks will be closely monitored to ensure that this expansion takes place at the desired pace.

At the same time, since such rate of credit expansion is considered adequate to deliver an economic growth of 7.5% in 2013 without giving rise to any unfavourable demand driven inflationary pressures, the risk of future inflation increasing is expected to be minimal.

Based on these factors, the Monetary Board at its meeting held on 16 January 2013 was of the view that current monetary policy stance is appropriate, and accordingly, the Repurchase rate and the Reverse Repurchase rate will remain unchanged at 7.50% and 9.50%, respectively, the Central Bank said.

The date for the release of the next regular statement on monetary policy will be announced in due course.