The Central Bank yesterday indicated that the economy remains healthy with improvement in all leading macro-economic indicators.
This favourable assessment follows the June monetary policy review whilst the policy rates were left unchanged as well.
“The favourable developments that were witnessed last year continued into 2011, especially in the Industry and Services sectors of the economy,” the Central Bank said. With regard to the Agriculture sector,
it said that although the Maha harvest was affected by the floods, the expected improvement in paddy harvest in the 2011 Yala season would serve to help the continuation of stable paddy prices throughout the year. With the continuous supply of vegetables and other field crops after the floods, domestic food prices have started to decline, thereby easing pressure on inflation.
In the international market, prices of cereals and sugar declined marginally from its peak early this year, while prices of most other commodities remain largely unchanged. Prices of Brent crude oil have been around US dollars 112 per barrel, on average.
As expected, inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI) (2002=100) declined in May 2011 to 8.8% from 9.8% in the previous month.
The annual average inflation showed a marginal increase of 0.3% to 6.9% in May, while the monthly change in the Index was 0.6%.
Both exports and imports continued to expand while earnings from tourism, workers’ remittances, and the inflows to the capital and financial account have resulted in the balance of payments recording a surplus in the first quarter of the year.
The provisional estimates show that the gross official reserves (without ACU receipts) have increased to US$ 7,055 million by 9 June 2011 from US$ 6,610 million recorded at end December 2010. So far during the year, in the domestic foreign exchange market, the rupee has appreciated by 1.34% against the US dollar, 0.88% against the Indian rupee, and 0.14% against the Japanese yen, while depreciating against the Euro by 6.06%, and by 3.59% against the pound sterling.
The fiscal consolidation process is expected to continue. Total revenue during the first four months increased by 18.4% compared to the corresponding period of 2010, while total expenditure and net lending increased only by 11.6% during the same period.
Broad money (M2b) recorded a year-on-year growth of 18.4% in April, with net credit to the Government and credit disbursed to the private sector contributing to this increase. Credit obtained by the private sector increased further during April, recording a year-on-year growth of 31.4% in April 2011, albeit on low base in 2010.
However, the increase in the amount of credit disbursed decelerated to Rs. 26 billion, from around Rs. 33-35 billion per month since August 2010. Meanwhile, credit obtained by public corporations declined by about Rs. 27 billion during the first four months of the year.
With recent monetary and fiscal policy measures, including the increase in the Statutory Reserve Requirement (SRR) and the increase in Excise duties, and the expected continuation of fiscal consolidation, broad money supply is expected to be consistent with macroeconomic developments.
Considering these the Monetary Board, at its meeting held on 13 June 2011, decided to maintain the policy interest rates of the Central Bank at their current levels. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would remain at 7% and 8.50%, respectively.
The release of the next regular statement on monetary policy will be on 8 July 2011.
FT Key Take
- Policy rates unchanged following June review
- Gross official reserves (without ACU receipts) up to $ 7,055 million by 9 June 2011 from $ 6,610 million recorded at end December 2010
- Total revenue during the first four months up 18.4% while total expenditure and net lending up by 11.6%
- Broad money (M2b) recorded a year-on-year growth of 18.4% in April,
- Credit obtained by private sector recorded a year-on-year growth of 31.4% in April 2011
Increase in the amount of credit disbursed decelerated to Rs. 26 billion, from around Rs. 33-35 billion per month since August 2010