Policy rates steady on contained inflation: CB

• Cabraal says that price pressures will remain, keeps policy rates and growth figures steady

The Central Bank kept policy rates unchanged yesterday, on expectations that inflation would remain contained to single digit levels on policy changes to reduce demand.

The concerted efforts by the Central Bank and the Government earlier this year to curb the high demand for imports and credit are yielding results, the statement noted.

“Reflecting the impact of the policy measures taken, credit obtained by the private sector has decelerated since the second quarter of 2012, and the policy measures in place are expected to help ensure that the growth of credit will be within the desired level at year end,” it said.

The monetary institution pointed out that compared to the average monthly credit expansion of about Rs. 52 billion in the first three months, average monthly credit decelerated to around Rs. 27 billion during the period from April-July.

“Benefiting from this moderation, growth of broad money has also decelerated to below 20 per cent in July for the first time this year. Nevertheless, the amount of credit available has been sufficient to facilitate reasonably robust economic activity, and as per estimates of the Department of Census and Statistics, the economy recorded a robust growth of 7.2 per cent during the first half of the year.”

The Central Bank kept the repo rate at 7.75 percent and the reverse repo rate at 9.75 per cent, unchanged for the fifth straight month.

“We think that inflation vulnerability still remains, but the chances are that it will be more on the side of moderating than increasing,” Central Bank Governor Ajith Nivard Cabraal told Reuters in a telephone interview.

Inflation in August eased to 9.5 percent from a year earlier from a 42-month high of 9.8 in July on improved food supplies.

“It moved up a little more than we expected particularly because of the drought. But last month it moderated slightly and this month we also believe it will stay flat. So that means we may not need any further action in the very near future.”

Last month, Cabraal said there was no need for a monetary policy response to rising inflation, which he attributed largely to supply constraints following the drought.

Tight monetary policies and a flexible exchange rate have already helped to boost external reserves by almost a quarter to $ 7.1 billion in the five months through end-July and reined in Sri Lanka’s trade deficit amid the global slowdown, the report added.

The rupee has fallen more than 16.5 per cent against the US dollar since November, swelling the cost of Sri Lanka’s imports.

The Central Bank has revised down its original eight per cent target to 7.2 per cent, from last year’s record 8.3 per cent.

The Finance Ministry has said the growth may range between 6.7 per cent and 7.2 per cent depending on the impact of a drought that has lasted since the beginning of the year. The International Monetary Fund has also lowered its forecast to 6.75 per cent this year from an earlier estimate of 7.5 per cent.

Cabraal, however, said the Central Bank would maintain its growth target at 7.2 per cent for the time being.

“We think it is still on track. But we will do a complete review in the next few days now that the figures are out for the first half and we will see whether it needs any change in the 7.2 per cent figure,” he said.

“There is a tendency, when the trade deficit falls, for the exchange rate also to appreciate to some extent,” he said.