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The Central Bank announced yesterday that policy rates will be kept unchanged following the Monetary Board review on Wednesday.
It said the move follows careful consideration of the macroeconomic conditions and expected developments on the domestic and global fronts.
The Monetary Board noted the recent acceleration of inflation, driven mainly by supply disruptions and the surge in global commodity prices, and reiterated its commitment to maintaining inflation at the targeted levels over the medium-term with appropriate measures, while supporting the economy to reach its potential in the period ahead.
In its statement, the Central Bank said the Sri Lankan economy is gradually recovering.
“The Sri Lankan economy witnessed a strong recovery during the first half of 2021, supported by fiscal and monetary stimulus measures. The re-emergence of the COVID-19 pandemic and the resultant disturbances to production activities appear to have affected the ongoing recovery somewhat during the third quarter of 2021. However, the available high frequency indicators suggest that economic activity is fast returning to normalcy,” it said.
The removal of COVID-19-related lockdown measures in October and the successful nationwide COVID-19 vaccine rollout would help activity in the period ahead. While real GDP growth is projected at around 5% in 2021, the ongoing rise in COVID-19 infections both globally and domestically could impact this expectation to some extent.
It also said that the external sector remains resilient against strong headwinds. Earnings from merchandise exports remained robust, recording over $ 1 billion for the fourth consecutive month in September.
Preliminary data show that merchandise exports have recorded an all-time high in October. Expenditure on imports also increased, widening the trade deficit during the nine months ending September over the corresponding period of the previous year. The tourism sector has displayed strong signs of revival with the easing of restrictions.
Despite subdued inflows on account of workers’ remittances in recent months, a rebound is expected in the period ahead with the continuous rise in worker migration and efforts taken to facilitate remittance flows through formal channels.
The depreciation of the rupee against the dollar is recorded at 7.2% thus far in 2021. The exchange rate has remained stable at around Rs. 200-203 against the dollar during the past three months. Meanwhile, gross official reserves were estimated at $ 2.3 billion by end-October. This, however, does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion (equivalent to approximately $ 1.5 billion).
Moreover, measures taken by the Government and the Central Bank to attract fresh forex inflows, as well as the anticipated inflows to the private sector, including the financial sector, are expected to augment gross official reserves, thereby strengthening the external sector in the period ahead.
Specifically, a greater conversion of export proceeds is observed, while negotiations with the foreign counterparts of the Government and the Central Bank are progressing, broadly in line with the path envisaged in the Six-Month Road Map.
Central Bank also said market interest rates have increased, reflecting the pass-through of tight monetary conditions. In response to the tight monetary and liquidity conditions, most market lending rates have adjusted upwards. Yields on Government securities, which increased notably, have stabilised with enhanced subscriptions at primary auctions, reflecting improved market sentiments.
Credit extended to the private sector, which expanded notably underpinned by eased monetary conditions, has slowed somewhat in September. However, data for the nine months ending September indicate that credit flows, particularly to the industry and services sectors of the economy, have improved significantly, thereby supporting the revival of the economy.
Credit obtained by the public sector from the banking system, particularly net credit to the Government, continued to expand. Overall, the growth of broad money (M2b) decelerated in September 2021, commensurate with the moderation of credit to the private sector and the decline in the net foreign assets of the banking system.
It said inflation accelerated recently mainly due to supply side disturbances and the surge in commodity prices internationally supply-side disruptions, removal of domestic price controls and upward adjustments to several administratively determined prices to reflect the rising global energy and other commodity prices along with the gradual firming of aggregate demand conditions, have pushed inflation above the targeted levels recently.
A further acceleration of headline inflation is possible in the immediate future, although such movements are expected to be transitory. The monetary policy measures already taken by the Central Bank will help curbing excessive demand pressures and preventing the build-up of adverse inflation expectations.
“In consideration of the current and expected macroeconomic developments the Monetary Board was of the view that the current policy interest rates are appropriate. Nevertheless, the Central Bank will remain vigilant and continue monitoring domestic and global macroeconomic and financial market developments and will take appropriate measures, as and when necessary, with the aim of ensuring stability in the external sector, maintaining inflation in the desired range, and supporting sustained economic recovery,” the Central Bank added.
