The Monetary Board yesterday decided to keep interest rates steady for a seventh straight month, largely on the confidence that recent policy measures have yielded desired results.
The move was widely anticipated whilst all of the 14 analysts polled by Reuters indicated same on Thursday. The repurchase and reverse repurchase rates remain unchanged at 7.75% and 9.75% respectively. The two benchmarks are at their highest in three years.
Following the November monetary policy review, the Central Bank in a statement said yesterday that reflecting the effectiveness of the policy measures in place, the growth of broad money and credit extended to the private sector decelerated sharply in the third quarter of the year, while the cumulative trade deficit for the first nine months of 2012 contracted for the first time since December 2009. In the monetary sector, broad money growth decelerated to 18.9%, year-on-year, in September from a peak growth of 22.9% in April 2012. The growth of credit to the private sector extended by commercial banks decelerated to 25.5%, year-on-year, in September, from over 35% seen prior to March 2012.
In the month of September, credit to the private sector expanded by less than Rs. 10 billion compared to the monthly increases of over Rs. 55 billion seen in February and March 2012. Net credit to the government and credit to public corporations also increased modestly in September, but on a cumulative basis credit obtained by the public sector was higher than the projected levels. As such, the Government’s commitment to continued fiscal consolidation, as expressed in the 2013 Budget speech, is likely to provide comfort to the conduct of monetary policy in the years ahead.
In the external sector, the contraction of the overall trade deficit over the first nine months of the year by 0.3% to $6,780 million was a result of imports declining significantly by 3.3% despite fragile global demand causing a decline in exports by 5.8% during the first nine months of 2012.
The decline in the trade deficit together with higher inflows from workers’ remittances, tourism, and capital inflows, resulted in a surplus of $269 million in the balance of payments by end September 2012 while gross official reserves increased to $7.1 billion, which is equivalent to 4.3 months of imports.
Dampened demand due to sluggish global economic recovery, political sparring over austerity measures in several EU countries, and the absence of proactive leadership amidst economic contraction will continue to affect Euro region’s economic stability, slowing the global economy further. With the conclusion of the US presidential elections, it is expected that a joint effort between the USA and the Euro region may aid expediting global economic recovery.
In the meantime, central banks in many advanced and emerging economies have eased monetary policy to deal with the turbulent events that may surface due to global developments.
Inflation continued its downward trend in October with the year-on-year change in the Colombo Consumers’ Price Index (CCPI) showing a marginal decline to 8.9% from 9.1% in September mainly due to lower food prices. The onset of the inter-monsoonal rains is likely to increase the supply of agricultural produce alleviating price pressures further. With water levels in the reservoirs rising, the power generation mix has also become more favourable to the macro economy.
Taking into account these developments, the Monetary Board of the Central Bank of Sri Lanka at its meeting held on 16 December 2012 was of the view that the current monetary policy stance is appropriate. Accordingly, the policy rates of the Central Bank will remain unchanged at their current levels, i.e., the Repurchase rate and the Reverse Repurchase rate would remain at 7.75% and 9.75%, respectively.
The date for the release of the next regular statement on monetary policy will be announced in due course.