In line with analysts’ expectations, the Central Bank yesterday kept policy rates unchanged – a move backed by favourable macroeconomic developments.
“Domestic economic activity continues to expand at a commendable pace, supported by improved external and domestic demand. Sri Lanka’s gross domestic product is estimated to have grown by around 8% in the first half of 2011, with both industry and services sectors recording impressive growth,” the Central Bank said yesterday, following the September monetary policy review.
“The contribution of the agriculture sector meanwhile has also been positive in the second quarter, following its contraction in the first quarter. The favourable outlook for domestic economic activity augurs well for domestic prices, going forward,” it added.
The Central Bank noted that although commodity prices have continued to remain elevated in international markets, improved domestic supply conditions and the stability of the Sri Lanka rupee have helped contain domestic inflation.
Both headline inflation and core inflation measured in terms of the CCPI (base=2006/2007) moderated in August 2011. Headline inflation declined to 7.0%, year-on-year, from 7.5% a month earlier, while core inflation declined to 7.8% in August 2011 from 8.9% in July.
Meanwhile, on a 12-month moving average basis headline inflation increased slightly to 7.1% while core inflation increased to 7.5% in August 2011, from 7.0% and 7.4%, respectively, in July.
The bank also said both exports and imports continued to grow at a rapid pace. Even though the deficit in the trade account has expanded, inflows into the services account as well as continued higher worker remittances have helped contain the deficit in the current account and maintain stability on the external front.
Meanwhile, foreign exchange inflows to the capital and financial account are also continuing in view of projects being implemented in diverse sectors of the economy.
Further, the Central Bank has also absorbed the proceeds of the sovereign bond issued recently, leading to the gross official reserves recording historically high levels.
With respect to monetary developments, Central Bank said broad money recorded a high year-on-year growth of 20.7% in July 2011, led by the robust expansion of credit obtained by the private sector, which in turn reflects largely the notable expansion of domestic economic activity.
“It is expected that the moderation of world economic activity along with the slowing down of both advanced economies as well as emerging economies would have some dampening effect on credit and therefore monetary expansion in the period ahead. Nevertheless, if warranted, appropriate monetary policy action would be taken to contain monetary expansion, going forward,” the Central Bank added.
The bank’s policy interest rates remain at current levels with its Repurchase rate at 7% while its Reverse Repurchase is rate at 8.50%.
The release of the next regular statement on monetary policy will be on 10 October 2011.