CB says policy changes working
The Central Bank has decided to keep its rates unchanged due to policy changes taken earlier in the year bearing results, it said in its Monetary Policy Review, adding that rupee depreciation would reduce impact from the drop in exports.
The decision results in the repurchase rate and the reverse repurchase rate remaining unchanged at 7.75 per cent and 9.75 per cent respectively, it said.
The Central Bank noted that policy changes earlier in the year had resulted in positive results in curtailing credit growth, reducing import demand and thereby stabilising the external sector.
The statement pointed out that the increase in private sector credit in absolute terms in April 2012 was only Rs. 18.7 billion; significantly lower than the average monthly growth of Rs. 51.8 billion in the first quarter 2012 and Rs. 27.4 billion in April 2011.
Meanwhile, market interest rates, which had increased substantially so far in 2012 as a result of tight monetary conditions, have started to stabilise in recent weeks.
“Cumulative trade data for the first four months of 2012 indicate that imports are decelerating at a rapid pace in line with the policy measures adopted,” it said.
Referring to the 9.2 per cent export earnings drop recorded in April the Central Bank assured the depreciation of the exchange rate “is expected to support export competitiveness, while further curtailing import expenditure, thereby significantly reducing the trade deficit in 2012”.
Since February the rupee has depreciated 13.6 per cent, according to Reuters.
The Central Bank went on to say inflows to the Colombo Stock Exchange and the mobilisation of foreign capital by commercial banks have been in line with projections, while the receipt of expected Foreign Direct Investment (FDI) inflows and workers’ remittances are expected to realise the projected surplus in the balance of payments in 2012.
It assured that in the meantime, gross official reserves increased to US$ 5,835 million by April 2012 from US$ 5,730 million in March 2012 and are expected to improve further during the rest of the year.
“At the same time, the strong growth momentum of the economy last year is estimated to have continued into the first quarter of 2012 supported by all three major sectors. As a result, although growth is expected to gradually moderate from the second quarter onwards, it is expected that the previously estimated 7.2 per cent growth for the year 2012 would be achieved.”
Inflation has remained at single digit levels for the past 40 consecutive months, although it increased in May 2012 to seven per cent on a year-on-year basis, mainly as a result of sharp revisions to several administratively determined prices and the depreciation of the exchange rate, the report noted.