Confident CB keeps policy rates unchanged

The Central Bank yesterday kept policy rates unchanged for the third consecutive month, largely on the confidence that recent measures taken have had desired stabilising effect so far.

In its statement following Tuesday’s July Monetary Policy Review, the Central Bank said inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index, increased to 9.3% in June 2012 from 7.0% in May 2012, while annual average inflation increased to 5.8% in June from 5.6% in the previous month.

The increase in inflation in June 2012 was mainly due to the lower base in June 2011, the impact of the prevailing drought conditions on domestic fresh food prices and the recent revisions to administratively determined prices.

At the same time, as a result of the several policy measures that are already in place to contain the emergence of demand side pressures arising from monetary expansion, broad money (M2b) growth decelerated to 20.9% in May 2012 from 22.9% in April 2012, while the growth of credit extended to the private sector by commercial banks also reduced from its peak of 35.2% in March 2012 to 33.5% in May 2012. Consequently, in the first five months of the year, credit extended to the private sector grew only by 10.5%.

 

In the meantime, provisional data shows that the growth of import expenditure has been shrinking sharply in the first five months of the year, thereby narrowing the trade deficit, compared to the high levels recorded in 2011.

With weaker global demand, most international commodity prices are also on a declining trend, which should, on a net basis, further ease pressure on the country’s imports this year, although the continuing sluggish global economic recovery may affect export earnings as well.

On the external front, by end-June 2012, Sri Lanka achieved all targets set under the Stand-By Arrangement (SBA) facility with the International Monetary Fund, thereby qualifying to receive the final tranche under the SBA facility.

Such disbursement, along with other expected significant foreign inflows are likely to strengthen the external position of the country in the coming months, and enhance the gross official reserves, which stood at US$ 5,815 million as at 31 May 2012, which is equivalent to 3.4 months of imports.

“Taking into consideration the above factors, and after reviewing the progress of the developments under the monetary policy measures that have already been taken, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 10 July 2012, decided to maintain the Repurchase rate and the Reverse Repurchase rate of the Central Bank unchanged at 7.75% and 9.75%, respectively,” the Central Bank said.

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