Market Rates Inch Upwards amidst Liquidity Tightening to Control Higher Credit Growth

11th January 2012, www.island.lk

The Monetary Board of the Central Bank has decided to hold key interest rates unchanged because it feels rising market interest rates would dampen demand and keep a check on growing credit, the bank announced. However, the sale of dollars to keep the exchange rate stable is drying up rupee liquidity in the system as well, and the Central Bank has made no mention of this aspect in its Monetary Policy Review for January which was released yesterday (Jan. 11).

The repurchase rate will remain unchanged at 7 percent and the reverse repurchase rate will stay steady at 8.50 percent. These rates apply to commercial bank overnight deposits of excess rupees with the Central Bank and for borrowings from the Monetary Authority as a last resort to maintain liquid positions.

Interest rates have come under pressure in recent months as liquidity tightened in the market due to high credit growth and dollar sales by the Central Bank to keep the rupee stable against the dollar despite severe import demand.

"Credit obtained by the private sector remained robust through 2011, and by November, recorded a year-on-year growth of 33.5 percent. Largely reflecting the robust expansion of credit, broad money growth also remained at a level higher than that projected for 2011. Year-on-year growth of broad money (M2b) was 20.6 percent by November. However, market interest rates moved upwards in recent months, in line with changing liquidity conditions in the domestic money market," the Central Bank said.

"As a result, the benchmark yield on one year Treasury bills recorded an increase of around 175 basis points in 2011, while the average weighted deposit rate (AWDR) recorded an increase of about 100 basis points. Meanwhile, the average weighted prime lending rate (AWPR) increased by around 120 basis points in 2011, although at the last auction, the weighted average yields on Treasury bills in the primary market remained unchanged, indicating some stabilisation in market conditions. These moderate upward movements in interest rates are likely to exert a restraining effect on monetary aggregates, which would, in turn, help to curb the build up of demand pressures," it said.

Dealers said pressure on yields was evident at this week’s auction of Treasury bills, but with state-names participating, the Central Bank could control rates to a certain degree. Interbank interest rates increased further yesterday.

The Sri Lanka Inter Bank Offered Rate increased to 9.12 percent yesterday from 8.84 percent the previous day.

Call money market rates for interbank borrowings without security edged up to 9.12 percent from 8.92 percent and market repo rates for borrowings backed by Treasury bills inched up to 8.30 percent from 8.11 percent.

The movement in these rates were kept in check by the Central Bank infusing Rs. 20 billion into the market through a cash auction, buying up Treasury bills at 8.17 percent.

Treasury bills stayed flat at yesterday’s auction.

The rupee closed at Rs. 113.89/90 against the dollar yesterday as the Central Bank continues to sell dollars to stabilise the rate at this level.

The bank has spent more than US$ 850 million on keeping the exchange rate steady since the rupee was devalued last November, Reuters reported yesterday. It spent a net US$ 1.79 billion in the first 10 months of last year to keep depreciation pressure at bay.

"Taking into consideration the above developments, the Monetary Board is of the view that the present policy framework does not require any adjustment and accordingly, at its meeting held on January 10, 2012, decided to maintain the Bank’s policy interest rates unchanged at their current levels, i.e., the Repurchase rate at 7.00 percent and the Reverse Repurchase rate at 8.50 percent, the Central Bank said.

With the country’s balance of payments under siege, as some dealers say, the Central Bank continued to be optimistic about the near term scenario on the external front. Notwithstanding the impact higher interest rates would have on finance costs, the Central Bank says inflation would remain at mid single digit levels throughout this year.

"In the third quarter of 2011, GDP grew by 8.4 per cent, with all three sectors, Agriculture, Industry and Services, contributing towards that growth performance. GDP growth in 2011 is estimated to be around 8.3 per cent. In the meantime, the significant structural changes that have taken place in the Sri Lankan economy over the last several years are expected to provide the momentum for the economy to grow by about 8 per cent in 2012, even in the midst of the slowdown in global economic activity," the Central Bank said.

"Continued development efforts aimed at improving economic and social infrastructure are expected to augment the productive capacity of the country and thereby enable the realisation of the country’s growth potential. Improvements in infrastructure would also help eliminate supply bottlenecks, thus helping to reduce price pressures. As inflation is expected to remain around mid-single digit levels in 2012, broad money (M2b) is expected to grow by around 15 per cent in 2012, as announced in the ‘Road Map for Monetary and Financial Sector Policies for 2012 and beyond’.

"The ongoing structural changes in the economy are also likely to be reflected in the external sector, with earnings from tourism projected to increase to US dollars 1.2 billion, migrant worker remittances expected to increase to US dollars 6.5 billion, foreign direct investment (FDI) projected to record US dollars 2.0 billion, and inflows of debt capital to the private sector also expected to increase significantly in 2012.

"On the fiscal front, preliminary estimates indicate that the government has contained the fiscal deficit to a level within the revised target of 7 per cent of the GDP in 2011. It is expected that the government would bring down the fiscal deficit to 6.2 per cent of the GDP in 2012, thereby augmenting the resource availability to the private sector further," the Central Bank said.

Dealers point out that increasing interest rates would make consolidation of the fiscal balance challenging.

Treasury Secretary Dr. P. B. Jayasundera recently called for a tightening of monetary policy (increasing rates) coupled with another devaluation of the rupee.

The release of the next regular statement on monetary policy will be on 9th February 2012.

Related Info :

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• Sri Lanka for Inflation Targeting from 2012 as Priority Shifts to Maintaining Prices over Growth 

• Sri Lanka Vulnerable to External Shocks - Moody's

Sri Lanka Policy Interest Rate Down to 6 Year Low to Revive Economy Following Slowing Inflation

20th August 2010, www.bloomberg.com

Sri Lanka’s central bank unexpectedly cut a benchmark interest rate to the lowest level in almost six years, taking advantage of slowing inflation to boost economic growth.

The Central Bank of Sri Lanka lowered the reverse repurchase rate by half a percentage point to 9 percent, the lowest level since November 2004, and kept the repurchase rate at 7.25 percent, according to a statement on the Colombo-based bank’s website today. All four economists surveyed by Bloomberg News had expected no change.

Sri Lanka’s inflation slowed in July for a fifth straight month on increased farm supplies, as land recovered from Tamil Tiger rebels after the end of the island’s civil war helped expand cultivation. The central bank said today it expects domestic credit conditions to ease, supporting a revival in economic growth.

“There is no danger to inflation with the rate cut,” said Sarath Rajapakse, director of research at Capital Trust Securities Pvt. in Colombo. “One of the biggest obstacles to growth had been high commercial bank lending rates.”

Consumer prices in the capital, Colombo, climbed 4.3 percent in July from a year earlier after gaining 4.8 percent in June.

Inflation in Sri Lanka has slowed to less than half the average rate of the five years through 2009.

Regional Moves

Sri Lanka’s move contrasts with those in other Asian central banks including India, Malaysia and Thailand, which raised borrowing costs this year to tame rising prices and prevent asset bubbles.

Governor Ajith Nivard Cabraal said earlier this month the central bank would gauge the impact of last month’s quarter- point interest-rate cuts before making its next move.

“While inflationary pressures in the domestic economy have continued to be benign in the recent months, enhanced prospects for domestic agricultural produce have further improved the outlook for inflation,” the bank said today.

The yield on the four-year government bond fell 5 basis points to 8.95 percent at 8:45 a.m. in Colombo, according to Standard Chartered Plc. The Sri Lankan rupee, which has gained about 2.4 percent since the civil war ended in May 2009, was little changed at 112.35 per dollar.

European Concessions

Rajapakse said low funding costs will also help boost consumer demand after the European Union withdrew concessions for Sri Lankan exports this year, saying the country failed to respond to European demands to improve human rights.

Sri Lankan exports, which make up about a fifth of the island’s $42 billion economy, gained 15.1 percent to $620 million in May, after advancing 24.2 percent in April.

President Mahinda Rajapaksa’s government is aiming to accelerate growth to 7 percent in 2010, the fastest pace since 2006, after ending a 26-year civil war by defeating the Liberation Tigers of Tamil Eelam rebels in May 2009.

Prospects of peace and faster growth are attracting overseas investment.

Emirates Telecommunications Corp., the United Arab Emirates’ biggest phone company, on July 20 announced plans to spend as much as $163 million in six months to expand its network in Sri Lanka. Minor International Pcl, Thailand’s biggest hotel

operator, has bought a controlling stake in a resort off Sri Lanka’s southern coast, amid growing leisure and business travel in the island.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

Sri Lanka to Keep Rates on Hold, No Plans to Sell any Bonds Immediately

18th May 2010, www.bloomberg.com, By Shamim Adam

Sri Lanka’s benchmark interest rates will likely remain unchanged this week as inflation remains “benign,” central bank Governor Nivard Cabraal said in an interview in Singapore today.

“We will see a similar situation being maintained because inflation figures have been moderate, it’s been quite benign,” he said after speaking at an investment seminar. “We still have a little slack, so most probably monetary policy will remain at the level that it is.”

Sri Lanka’s policy makers are seeking to stoke growth after the end of a civil war in 2009. The central bank, which will release a policy statement on May 20, left the reverse repurchase rate unchanged at 9.75 percent last month, its lowest level since August 2005, and maintained the repurchase rate at 7.5 percent.

Consumer prices in the capital, Colombo, rose 5.8 percent in April from a year earlier, according to the statistics department. Inflation averaged 12.6 percent in the five years through 2009.

Peace in the South Asian nation is attracting tourists and investment, helping companies such as John Keells Holdings Plc, which has port, supermarket, hotel, property development and brokerage arms. Sri Lanka’s stock index is one of the world’s best performers in the past year.

The economy may expand more than 6 percent this year, Cabraal told investors today, supporting the central bank’s forecast for growth of 6.5 percent in 2010, the fastest pace in three years.

The island doesn’t plan to sell any bonds immediately and will review its funding options after the budget is unveiled, he added. The governor said last month Sri Lanka may sell more dollar-denominated bonds this year to fund its budget deficit.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Sri Lanka’s Economy Grows at Fastest Pace This Year. End of War and 5-Year-Low Interest Rates Spurr Consumer and Company Spending

18th December 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka’s economy grew at the fastest pace this year as the end of the civil war and interest rates at a five-year low spurred consumer and company spending.

Gross domestic product expanded 4.2 percent in the three months ended Sept. 30 from a year earlier after gaining 2.1 percent in the previous quarter, the statistics department said in a statement in Colombo today.

The defeat of Tamil Tiger rebels in May this year after 26 years of war has encouraged some of the island’s biggest companies including John Keells Holdings Plc and Aitken Spence Plc to expand their business. The central bank has room to maintain rates at current levels because of low inflation, Governor Nivard Cabraal said last month.

“The end of the war has rejuvenated economic activity in Sri Lanka,” said Bimanee Meepagala, an analyst at Eagle NDB Fund Management Co. in Colombo. “As the infrastructure in the war-affected areas gets put in place and credit demand picks up, we will see the growth momentum really take off.”

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid package in July to rebuild roads and schools, expects the island’s growth to pick up from this year.

Sri Lanka’s benchmark Colombo All-Share index, has doubled this year, and is the world’s best performer after Russia. Since the end of the fighting in May, Sri Lanka’s rupee has gained 0.76 percent to 114.25 against the U.S. dollar.

Companies Expand
John Keells, Sri Lanka’s biggest diversified company, said last month it will invest about $100 million to build new resorts to benefit from an economic resurgence after the war.

Aitken Spence Plc., Sri Lanka’s biggest operator of resorts, plans to expand its hotel and shipping businesses while Commercial Bank of Ceylon Plc, the nation’s biggest private lender by assets, aims to extend more loans in the island’s northern and eastern regions, which were recaptured from the Tamil Tigers.

Cabraal has cut lending rates five times this year to revive growth as inflation plunged from a record high in June 2008 to a five-year low in September. On Dec. 14, he maintained the reverse repurchase rate at 9.75 percent and held the repurchase rate at 7.5 percent.

Consumer prices in the capital, Colombo, rose 2.8 percent in November from a year earlier after gaining 1.4 percent in October. Cabraal aims to keep inflation below 10 percent this year and next to spur spending.

Appropriate Rates
Policy rates are at an appropriate level to support growth and are likely to remain at current levels “in the near future,” Cabraal said in a Nov. 26 interview.

“This will result in quite a bit of activity mid next year, especially in areas like housing that came to a grinding halt over the last 24 months because people couldn’t afford to borrow,” Ajit Gunewardene, deputy chairman at John Keells, said in an interview in Colombo on Dec. 14. “We’re expecting property development to kick in countrywide.”

The central bank wants to help lift growth to as much as 6 percent in 2010 from 3.5 percent in 2009.

Commercial bank loans rose to 1.18 trillion rupees ($10.3 billion) in September, the first expansion this year, from 1.17 trillion rupees in August.

President Mahinda Rajapaksainstructed state banks to slash lending rates by about 7 percentage points from Oct. 28 to government employees, farmers, small businesses and industries including fisheries and tourism. Non-state banks followed by reducing their rates too.

Sri Lanka, which makes garments for Marks & Spencer Group Plc, The Gap Inc. and Victoria’s Secret, will also see a recovery in overseas orders from the first quarter of 2010, Cabraal said last month. Sri Lanka’s exports have dropped for 10 consecutive months.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

Sri Lanka Keeps Benchmark Rate at Five-Year Low to Support Island’s Economic Recovery

14th December 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka’s central bank kept its benchmark interest rate unchanged at a five-year low to support the island’s economic recovery.

The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent, according to a statement on the Colombo- based bank’s Web site today. The decision was expected by all seven economists in a Bloomberg News survey. The repurchase rate was also maintained at 7.5 percent.

Central Bank Governor Nivard Cabraal aims to keep inflation below 10 percent this year and next to spur spending and bolster the economy after the end of a 26-year civil war in May. Consumer prices in the capital, Colombo, rose 2.8 percent in November from a year earlier, the biggest gain in six months.

“The objective of the central bank is to maintain lower inflation and boost growth rather than create unsustainable inflationary growth,” said Danushka Samarasinghe, research manager at Asia Securities Ltd. in Colombo.

The central bank forecasts Sri Lanka’s gross domestic product will expand as much as 6 percent in 2010 from 3.5 percent this year.

Commercial bank loans rose to 1.18 trillion rupees ($10.3 billion) in September, the first expansion this year, from 1.17 trillion rupees in August.

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid package in July, expects the island’s economic growth and credit demand to pick up from this year, Brian Aitken, the Washington-based lender’s mission chief, said Nov. 20.

‘More Favorable’
“Inflationary pressures continue to remain subdued,” the central bank said in today’s statement. “Prospects for domestic economic activity have improved with the more favorable investment climate that now prevails and the gradual recovery of the world economy.”

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, has more than doubled this year as investors seek to take advantage of the end of the island’s civil war.

Commercial Bank of Ceylon Plc., Sri Lanka’s biggest private lender by assets, said last month it plans to expand in the island’s northern and eastern regions by the end of 2011, anticipating loans will grow as the economy recovers.

President Mahinda Rajapaksainstructed state banks to slash lending rates by about 7 percentage points from Oct. 28 to government employees, farmers, small businesses and industries including fisheries and tourism. Private banks have followed by reducing their rates.

Time Lag
Cabraal on Nov. 18 lowered the central bank’s reverse repurchase rate from 10.5 percent and cut the repurchase rate from 8 percent. Interest rates have dropped amid monetary policy easing “albeit with a time lag,” the bank said Nov. 18.

Cabraal said Oct. 6 consumer prices will probably climb as much as 5 percent this year, and between 5 percent and 6 percent in 2010.

Policy rates are at an appropriate level to support growth and are likely to remain at current levels “in the near future,” Cabraal said in a Nov. 26 interview.

The economy may have expanded about 6 percent in the three months through September from a year earlier, after gaining 2.1 percent in the second quarter, boosted by agriculture and tourism, Cabraal said last month.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

SL Central Bank Interest Rate Cut, A 5 Year Low to Boost Growth

18th November 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka’s central bank cut its benchmark interest rates to a five-year low to spur credit demand and support a recovery in the island’s economy.
The Central Bank of Sri Lanka lowered the reverse repurchase rate to 9.75 percent from 10.5 percent, according to a statement on the Colombo-based bank’s Web site today. The repurchase rate was reduced to 7.5 percent from 8 percent.

Sri Lanka will conduct monetary policy “cautiously” to keep inflation below 10 percent while sustaining an economic recovery after the end of a 26-year civil war, the central bank said in a publication this month. Consumer prices in the capital, Colombo, rose 1.4 percent in October from a year earlier, the fastest pace in five months.

“Risks to inflation are biased to the upside, on account of commodity price movements and an improved growth outlook,” said Prakriti Sofat, an economist at Barclays Plc in Singapore.

Central Bank Governor Nivard Cabraal said Oct. 6 that consumer prices will probably rise as much as 5 percent this year, and between 5 percent and 6 percent in 2010. The central bank has room to cut interest rates if inflation remains “persistently low,” he said.

Cabraal had slashed borrowing costs to spur spending and make up for slowing exports.

“Although inflation is expected to rise moderately in 2010 due to the gradual decline of the base effect of low inflation in 2009, it is expected to remain relatively subdued,” the central bank said in its statement today.

Civil War

The central bank expects the island’s $41 billion economy to grow as much as 6 percent next year after expanding about 3.5 percent in 2009, helped by rebuilding efforts after the government defeated the separatist Liberation Tigers of Tamil Eelam rebels in May.

The end of Sri Lanka’s civil war has buoyed Colombo’s All- Share Index, which has outperformed all other benchmarks in Asia this year with a 98 percent gain.

Mark Mobius, who oversees about $25 billion of emerging market assets as chairman of Templeton Asset Management Ltd., told Bloomberg News last week that he is seeking private equity or strategic investments on the island.

The central bank on Sept. 11 lowered the reverse repurchase rate to 10.5 percent from 11 percent, and cut the repurchase rate to 8 percent from 8.5 percent.

‘Appropriate Measures’

The central bank said today it will take “appropriate measures to reduce the level of excess liquidity to a more desirable level.”

The bank said market interest rates had dropped amid easing monetary policy “albeit with a time lag,” while commercial banks’ lending rates had also started to decline sharply.

The government will maintain fiscal and monetary stimulus through 2010 to stoke an economic recovery, Deputy Finance Minister Sarath Amunugama said Nov. 9.

President Mahinda Rajapaksainstructed state banks to slash lending rates by about 7 percentage points from Oct. 28 to government employees, farmers, small businesses and industries including fisheries and tourism.

The International Monetary Fund said on Nov. 9 the release of a second payment in its $2.6 billion loan to Sri Lanka indicates a strong performance and fiscal commitment from the South Asian island economy.

The central bank this month began draining funds from the local financial system using currency swaps after auctioning its own securities for the first time in October to absorb surplus funds. Excess money typically fuels inflation.

Sri Lanka’s foreign reserves have risen to unprecedented levels since the IMF loan was approved in July and the end of the civil war.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

Interest Rates in Treasury Bills Decline Further In Line with the Easing of the Monetary Policy by the Central Bank of Sri Lanka

6th November 2009, www.dailymirror.lk

The yield rates on Treasury Bills declined further at the primary auction held yesterday. The yield rate on Treasury bills with a maturity of 91 days declined by 36 basis points to 8.14 per cent, the lowest since May 2005. This trend was reflected in the yield rates of Treasury Bills with the maturities of 182 days and 364 days as well.

With this reduction, the primary market yield rates of Treasury Bills have declined by 906 - 938 basis points during the past 12 month period. The secondary market Treasury Bill yield rates also continued on its decelerating path during this period.

In the meantime the primary and secondary market yield rates for Treasury Bonds also followed the same trend and declined by 843 - 1088 basis points during the past 12 month period while the extension of the yield curve upto the 6 year horizon was also witnessed during this period with the prudent public debt management strategies.

The reduction in yield rates observed during the recent past is in line with the gradual easing of the monetary policy stance by the Central Bank of Sri Lanka, increased foreign investor participation in the Government securities market, prevailing liquidity position in the market and positive view of the market on the deceleration of inflation rate.

State Banks Lower Interest Rates in Sri Lanka on Loans to Customers to a Minimum of 8% and a Maximum of 12% from Today

28th October 2009, www.dailynews.lk, By Sanjeevi Jayasuriya

All State banks will bring down their interest rates on loans granted to customers to a minimum of eight percent and a maximum of 12 percent with effect from today.

Following the Central Bank’s reduction of interest rates to very low level of 3-4 percent and having stability in the interest rates, the country’s economic revival should accelerate.

The banking system will move to a low interest rate regime, Finance Ministry Secretary Dr. P.B. Jayasundara told theDaily News.

The Central Bank policy rate 7 percent will be a benchmark in the short-term interest rates to medium-term where Treasury Bills and Treasury Bonds rate would decline and the lending in other sectors will be in line with the reduced interest rates, he said.

The activities of the State banks were reviewed and instructions were given to the bank heads by President Mahinda Rajapaksa at a meeting held yesterday, at Temple Trees, Colombo.

The State banks will offer development oriented interest rates in the range of 8 to 12 percent in line with inflation.

The lending will be mainly for housing. The State banks will lend to public servants and the entire pending loan applications will be accommodated and would be cleared by mid December.

The State banks have the liquidity and they are in a position to do this due to 500 million bond issue that cleared the outstanding loans by the Government. The priority will be given to sectors such as agriculture, tourism, construction, livestock, fisheries and small and medium scale enterprises and these sectors will benefit under the low interest regime, he said.

The banks have funds to lend and help economic revival and provide stimulus to overall economic activities.

An outcome of the meeting was the suspension of the penal rate imposed on the non-performing loans. The removal of the penal rates would bring down cost of funds. Low interest rates would also apply to the outstanding balances of the existing loans, he said.

Banks are expected to notify customers about the amended loan installments due from them in terms of the reduced interest rates.

The President also decided to convene another meeting before November 30 to review the progress achieved in implementing the decisions taken at yesterday’s meeting.

State Revenue and Finance Minister Ranjith Siyambalapitiya, Secretary to the President Lalith Weeratunga, Treasury Secretary Dr. P.B. Jayasundera, Chairmen of all State banks and several other senior officials attended the meeting.