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Industry sector and a recovery in the Services sector, although Agriculture sector was impacted.
“The gradual increase in GDP growth confirms the potential of the economy to achieve the targeted growth of 7.5% for 2013, recovering from the deceleration observed in 2012. Along with the normalisation of domestic economic activity, the expected recovery in the global economy would provide further impetus to the growth momentum of the economy,” the Central Bank said.
It said the external sector remained stable, supported by the improving trade deficit, foreign inflows in the form of earnings from tourism, workers’ remittances, Foreign Direct Investments (FDI), foreign debt capital to the banking sector and foreign investments in Government securities. However, some volatility was observed in the domestic foreign exchange market recently, which could be attributed to the likely tapering of Quantitative Easing (QE) in the United States affecting emerging markets.
Meanwhile, the expected proceeds of the international bond issued by the National Savings Bank (NSB) have strengthened market confidence and displayed that the recent episode of rupee depreciation was mostly speculative. While supporting financing of the savings-investment gap, the receipt of the proceeds of the NSB bond would further enhance the gross official reserves facilitating the achievement of the end year target of $ 7.0 billion.
The reduction in the Central Bank’s policy rates in May 2013 followed by the reduction in the SRR in July have eased conditions in the domestic credit markets, thereby bringing down market interest rates. The downward movement of short term interest rates has begun to permeate to interest rates of longer term loans and this trend is expected to gather momentum over the coming months, further reducing the borrowing costs of economic agents.
Benefitted by these developments, credit extended to the private sector by commercial banks, in absolute terms increased by Rs. 28.5 billion in July 2013, although on a year-on-year basis, credit growth decelerated to 8.4% in July compared to 8.9% in June, due to the base effect.
Reflecting the expansion of credit to both the private and the public sectors, broad money (M2b) growth in July was 16.4%, higher than the average monetary expansion of 15% targeted for 2013.
Continued fiscal consolidation efforts by the Government and greater financial discipline of public corporations are expected to reduce the public sector’s reliance on banks, thereby passing the benefit of monetary easing to the private sector.
With regard to inflation, the outlook continues to remain favourable. So far during the year, inflation has benefitted from the absence of upward pressures from international commodity prices and increased domestic food supplies along with favourable weather conditions and subdued demand pressures.
Accordingly, inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (2006/07=100), increased marginally to 6.3% in August from 6.1% in the previous month, while core inflation remained unchanged from the previous month at 3.1%.
Taking into account the developments discussed above, the Monetary Board at its meeting held on 16 September 2013 was of the view that the current monetary policy stance is appropriate, and accordingly, decided to maintain the Repurchase rate and the Reverse Repurchase rate of the Central Bank of Sri Lanka at their current levels of 7.00% and 9.00%, respectively.
The date for the release of the next regular statement on monetary policy would be announced in due course.
