CB lights up economy on Vesak!

Perhaps in a perfect fit for Vesak, the Central Bank yesterday suggested the economy was bright as most macroeconomic fundamentals were sound and improving hence left policy rates unchanged.

The stance of the Central Bank was also contrary to some analysts expectations of a revision.

However, following the Monetary Board’s May review yesterday the Central Bank said with the continuation of the momentum in the Industry and Services sectors led by trade related activity and tourism, as well as the continuous improvements in productivity, the growth in real GDP during the first quarter of 2011 was largely within targets, although there was a setback in the Agriculture sector.

It said domestic supply conditions have recovered from the impact of floods in early 2011, and the current weather conditions are favourable for agricultural activity and hydropower generation. The upward trends that were observed in international commodity prices have decelerated, although prices of many commodities still remain high. The geopolitical disturbances observed in many oil producing economies seem to have subsided, stabilising international crude oil prices.

On inflation, Central Bank said as measured by the year-on-year change in Colombo Consumers’ Price Index (CCPI) (2002=100) increased to 9.8 per cent in April 2011 compared to 8.6 per cent in March, while the annual average inflation also increased from 6.2 per cent in March to 6.6 per cent in April.

However, the monthly increase in CCPI in April was marginal at 0.1 per cent, and the improving supply conditions are likely to moderate on prices from May onwards.

With the high anticipated international commodity prices, the trade deficit is likely to widen in 2011, while higher earnings from the tourism industry, workers’ remittances, and higher capital inflows are expected to have a positive impact on the overall balance of payments.

As per the provisional estimates, the gross official reserves (without ACU receipts) have increased to US dollars 7,120 million by 12 May 2011 from US dollars 6,993 million recorded at end March 2011. So far, this year, in the domestic foreign exchange market, the rupee has appreciated by 1.08 per cent against the US dollar and by 1.22 per cent against the Indian rupee, while depreciating against the Euro (4.61 per cent), the sterling pound (3.51 per cent) and the Japanese yen (0.39 per cent).

Government revenue during the first three months of 2011 increased by 19.5 per cent compared to the same period in 2010. The recent revision in the Excise duty on the importation of motor vehicles effective from 24 April 2011 is likely to improve Government revenue. It is expected that fiscal consolidation measures would continue, and the fiscal deficit target announced by the Government would be within reach.

Growth of broad money (M2b), though declined marginally in March 2011, remained relatively high at 17.5 per cent, primarily due to the rapid increase of credit granted to the private sector. It is likely that the growth rate of credit would subside from April 2011, due to the effect of a high base and also with the dissipating high demand for credit to certain sectors, such as the heavy purchase of motor vehicles that was observed in the past few months. At the same time, the market is responding to the change in Statutory Reserve Ratio (SRR) implemented with effect from 29 April 2011, which resulted in absorbing Rs. 18 billion from the banking system.  

Considering these the Monetary Board, at its meeting held on 16 May 2011, decided to maintain policy interest rates of the Central Bank at their current levels.  

The release of the next regular statement on monetary policy will be on 10 June 2011.