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Private sector steps up borrowing


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  • March records 14% increase or Rs. 41.4 b bringing first quarter total to Rs. 87 b
  • CB projects private sector credit will increase further in the period ahead supporting the growth momentum of the economy
  • Policy rates unchanged in May monetary policy review

 

The private sector of the Industry and Services segments has stepped up borrowing in March, helped by the continuation of a low interest rate regime, the Central Bank revealed yesterday. 

It said that following a reduction in policy rates in April 2015, market interest rates had adjusted downwards as expected. The continuation of the low interest rate regime had induced demand for bank credit from the private sector. 

As a result, the Central Bank said credit obtained by the private sector from commercial banks rose by 14% in March on a year-on-year basis. In absolute value terms, the increase during the month was Rs. 41.4 billion, raising the cumulative increase in credit to the private sector by commercial banks to Rs. 86.9 billion in the first quarter of 2015. In February, growth of private sector credit was 12.6% or Rs. 24.5 billion in absolute terms in February 2015.

As per the Quarterly Survey of Commercial Banks’ Loans and Advances to the Private Sector, the sustained expansion in credit was driven mainly by credit flows to the Industry and the Services sectors. 

“Given continued low market interest rates, it is projected that private sector credit will increase further in the period ahead supporting the growth momentum of the economy,” said the Central Bank which kept policy rates unchanged during the May monetary policy review. It said that as a result of increased credit flows to both the private and public sectors, broad money (M2b) grew by 12.5% in March 2015 on a year-on-year basis, along the expected path for monetary expansion.

The Central Bank said that inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI), remained at 0.1% in April 2015 unchanged from the previous month. Year-on-year headline inflation has remained below 1% from February 2015 largely reflecting the downward revision of domestic energy prices and the reduction in prices of selected consumer items. 

Annual average inflation declined further to 2.1% in April 2015 from 2.5% in the previous month. Meanwhile, core inflation, on a year-on-year basis, increased to 2.4% in April 2015 from 1.4% in March, with price increases being recorded mainly in non-food items such as health services and clothing. 

Going forward, with improved domestic supply conditions and subdued prices of key commodities in the international market, it is projected that inflation will remain at low levels in the months ahead.

In the external sector, the recent currency swap agreement with the Reserve Bank of India amounting to US dollars 400 million has strengthened official reserves of the country. The realisation of expected capital inflows in the period ahead and sustained regular inflows in the form of earnings from the export of goods and services, including tourism and workers’ remittances would improve the balance of payments during the year. So far in 2015, the Sri Lankan rupee has depreciated against the US dollar by around 2.0%.

In this background, the Monetary Board was of the view that the current monetary policy stance is appropriate. Accordingly, the Monetary Board, at its meeting held on 21 May 2015, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00% and 7.50%, respectively.

 


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