Sri Lanka policy rates unchanged: Inflation declines due to crude oil prices: Central Bank

Dec 12, 2014 (LBO) – Sri Lanka Central Bank says the current monetary policy stance is appropriate and accordingly decided to unchange the policy rate corridor at 6.50 percent to 8.00 percent, respectively.

 

The island’s inflation continued to remain in low single digit levels, for 70 consecutive months and at levels below 5 percent in the last 12 months.

In October and November 2014, headline inflation (YOY) was at 1.6 percent and 1.5 percent, mainly due to the downward revisions to domestic fuel and electricity prices, the bank said in its December monetary policy review.

“The recent decline in crude oil prices in the international market is likely to impact inflation and Inflation expectations favorably,” the regulator said in the policy review.

“Given Sri Lanka’s large dependence on imported sources of energy, lower inflation resulting from declining energy prices would support the expansion of economic activity domestically,” the Central Bank said.

Core inflation remained unchanged at 3.6 percent in November 2014.

In spite of the ongoing recovery of private sector credit growth, Broad Money growth (YOY) moderated to 11.5 percent in October 2014 as a result of the decline in net foreign assets (NFA) of the banking system.

Broad Money growth has averaged 13.3 percent during the first ten months of the year.

Credit to private sector has grown by 5.1 percent in October 2014, year on year and reported a 42 billion rupee increase during the month. 36 billion rupees was disbursed by Domestic Banking Units (DBUs) of commercial banks.

“The impact of the contraction in pawning advances on the overall credit growth that was observed since early 2013 has now ended,” the regulator said.

The bank says going forward, continued improvements in macroeconomic fundamentals would bolster market confidence and nurture positive investor sentiments enabling the maintenance of a high sustainable growth rate in the medium term.

In the external sector, volatile global conditions, cross currency movements and eased monetary conditions widened the trade deficit somewhat in October 2014.

“Given the continued and expected inflow of earnings from tourism, workers’ remittances and inflows to the financial account, the balance of payments (BOP) is projected to record a higher surplus in 2014 than in the previous year.

Accordingly, gross official reserves are expected to remain at comfortable levels by end 2014,” the Central Bank said.