Sri Lanka Increases Policy Rates by 50 Basis Points to Control Private Sector Credit Growth

03rd February 2012, www.dailymirror.lk

The Monetary Board of Sri Lanka has finally decided to increase the policy rates by 50 basis points owing to increased private sector credit growth that is resulting in a widening trade deficit.

Accordingly the Central Bank of Sri Lanka (CBSL) in a statement said the its new Repurchase rate and the Reverse Repurchase rate will be 7.50 and 9 percent, respectively.

The CBSL said credit granted by commercial banks to the private sector increased by 34.5 percent, year-on-year, in December 2011, substantially exceeding projections, driven by import related items such as motor vehicles.

At the same time, excess liquidity in the domestic money market declined from Rs.124 billion as at end 2010 to the current level of around Rs 15 to 20 billion, and such decline in liquidity in the domestic money market  led to  market interest rates  recording  an upward movement  in recent months.

The CBSL also said gross official reserves (excluding Asian Clearing Union balances)  declined to US dollars  5.9 billion by end December 2011, representing the equivalent of 3.6 months of imports.

Sri Lanka being an import oriented country, CBSL has been defending the LKR to keep inflation at single digit levels, while keeping the interest rates down to spur growth.

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Sri Lanka Policy Rates Unchanged as Inflation Remains Low and Credit Flows Picking Up

19th October 2010, www.lankabusinessonline.com

Sri Lanka's central bank will maintain benchmark interest rates at current levels as inflation remains low, credit flows are picking up and economic growth strong, a statement said.

The Monetary Board of the bank at Monday's meeting decided to maintain the Repurchase rate and the Reverse Repurchase rate at 7.25 percent and 9.00 percent, it said.

"Economic growth remains robust and broad based with all sectors contributing to the expansion of output," it said.

"Credit flows continue to rebound with credit to the private sector from commercial banks growing on a year-on-year basis by 12.8 percent in August 2010, further reinforcing the growth prospects."

At the same time, the bank said, year-on-year growth in broad money remains moderate at 13.9 percent in August.

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index, increased in September to 5.8 percent from 05 percent in August.

"However, inflation is expected to remain subdued over the coming months," the central bank said.

The successful issue of a 10-year international sovereign bond on 27 September at a comparatively lower coupon rate of 6.25 percent and which was oversubscribed six times "reflects the improved investor confidence in the economy".

Gross international reserves further increased with the receipt of the fifth tranche of an International Monetary Fund stand-by loan and the proceeds of the international sovereign bond.

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 Cuts Policy Rates. Private Sector Credit to Pick Up

09th July 2010, www.island.lk

The Monetary Board of the Central Bank has brought down policy rates by 0.25 percent and revised annual average growth rates on reserve money to 21.2 percent from an earlier target of 14.5 percent, in a move bank dealers anticipated that would facilitate private sector credit growth and enhance GDP growth.

The Monetary Board has reduced the repurchase and reverse repurchase rates by 0.25 percent each to 7.25 percent and 9.5 percent respectively. The repurchase rate is the rate at which commercial banks deposit excess funds with the Central Bank, while the reverse repurchase rates apply to overnight borrowings of the banking system from the Central Bank.

"We were expecting this reduction to policy rates even though some analysts had been concerned about rising inflation. When policy rates come down, Treasury bill rates and bank rates come down and this would help the government bring down the budget deficit as interest costs come down," a commercial bank dealer said speaking to The Island.

Sri Lanka Holds Key Policy Rates. Prospects for Domestic Economic Activity Improved

14th December 2009, www.lankabusinessonline.com

Sri Lanka's central bank said it was holding its key policy rate at which money is injected to the economy at 9.75 percent and the rate at which money is drained at 7.50 percent to support credit growth, despite a pick up in inflation.

"Prospects for domestic economic activity have improved with the more favourable investment climate that now prevails and the gradual recovery of the world economy, supported by the relaxed monetary policy stance of the Central Bank," the monetary authority said.

"Hence, it is expected that credit flows will gradually pick up, with the more favourable credit conditions that prevail on account of the decline in market interest rates as well as the more stable conditions in financial markets."

The Central Bank said the outlook for inflation was "benign" though inflation in the 12-months to November picked up to 2.8 percent.

There have been rising concerns that inflation was being stoked up amid loose US monetary policy (the rupee is pegged to the dollar) and excess liquidity in the banking system.

Though money supply was expanding, the Central Bank said it was within targets.