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Saturday, 5 March 2022 00:47 - - {{hitsCtrl.values.hits}}
By Charumini de Silva
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Central Bank Governor Nivard Cabraal gestures during his post-Monetary Policy Review meeting media briefing yesterday – Pic by Upul Abayasekara
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The Central Bank yesterday further tightened the monetary policy with new measures to ensure macro-economic stability amidst rising shocks both internal and external.
Considering the current and expected macroeconomic developments both globally and domestically, the Monetary Board decided to increase its Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points each, to 6.50% and 7.50 respectively.
The Monetary Board also revised upwards the caps imposed on interest rates applicable to credit cards to 20% per annum, on pre-arranged temporary overdrafts to 18% per annum and on pawning facilities to 12% per annum.
CBSL in a statement post March monetary policy review said: “measures will dampen the possible build-up of underlying demand pressures in the economy, which would, in turn, help ease pressures in the external sector, thus promoting greater macroeconomic stability.”
It also stressed concerted efforts will need to be urgently taken by the Government to complement the efforts taken by the CBSL to overcome the present economic challenges. As its Economic and Financial Advisor, the CBSL listed eight recommendations to the Government to diligently consider. (See box).
“We have done a monetary policy rate hike of 100 basis points, which is one of the higher ranges of rates announced in the last 15 to 20 years. Nevertheless, we think it has to be supplemented with other forms of measures which need to be taken by the Government as well,” Central Bank Governor Nivard Cabraal told journalists in his post-Monetary Policy Review meeting briefing yesterday.
This is also the third time that the banking regulator increased rates since August 2021 with the previous one being in January.
In its statement, the CBSL said global and domestic developments have posed challenges to the recovery of the economy.
The Monetary Board noted the supply side disruptions, increasing global commodity prices and associated domestic administrative price adjustments, and food supply disruptions have been the key drivers of rising inflationary pressures domestically.
The Central Bank also said that these disruptions have to be addressed immediately to ensure the continuation of uninterrupted domestic production and the momentum in exports, while continuing with the efforts to strengthen the production economy through well-targeted growth policies.
“Although the domestic economy is expected to make headway underpinned by the successful COVID-19 vaccination drive of the Government and relaxed mobility restrictions. However, economic activity is somewhat affected by recent adverse developments in the global front, in terms of supply chain disruptions and rising commodity prices, as well as in the domestic front, particularly in the form of power and supply interruptions,” it added.
Following the unrest between Eastern Europe and the higher outflow of foreign exchange, the Central Bank said the external sector is faced with heightened challenges.
“Despite earnings from merchandise exports continuing to record over $ 1 billion for the eighth consecutive month in January 2022, the expenditure on imports continued to increase at a higher pace. Tourist arrivals increased noticeably thus far during the year, although recent geopolitical tensions may affect the tourism industry to some extent,” it added.
Regardless of subdued inflows on account of workers’ remittances in recent months, the Central Bank said a rebound in workers’ remittances is expected in the period ahead, as worker migrations have increased notably and due to the measures taken to combat illegal money transfers, while encouraging remittances through formal channels via several incentives.
The monetary policy said Sri Lanka rupee was maintained broadly stable, while the gross official reserves as of end January are provisionally estimated at $ 2.4 billion, equivalent to 1.3 months of imports.
At the same time, the Government and the Central Bank have been avidly pursuing avenues to attract fresh foreign exchange inflows while facilitating continued domestic economic activity.
In terms of the market interest rates, it said the ratios were trending upwards. “The expansion of domestic credit, particularly credit to the public sector, was robust. Nevertheless, some slowdown in the growth of broad money (M2b) was observed due to the decline in net foreign assets (NFA) of the banking system”.
Following the monetary tightening measures, it also pointed out that the market interest rates are adjusting upwards. However, the adjustment in deposit interest rates remains sluggish, which has been inadequate to attract deposits into the banking system from the excessive currency in circulation. “Therefore, banks and financial institutions are urged to make the required adjustments to deposit interest rates in order to promote savings,” the Central Bank said.
Meanwhile, yields on Government securities have also increased notably to reflect market conditions in view of the higher financing requirement of the State. The Central Bank also said that the supply side factors have contributed to price pressures, while the build-up of aggregate demand pressures is also visible.
“The acceleration in core inflation also reflects the firming up of aggregate demand conditions in the economy propagated by the accommodative monetary conditions and fiscal measures that were in place since the onset of the pandemic. While inflationary pressures are expected to remain elevated in the near term, the pressures emanating from the build-up of aggregate demand require proactive measures to anchor inflation expectations and retrace inflation to the desired levels over the medium term,” it said.
