Sri Lanka keeps its key policy rates unchanged, expects a dampening effect on credit growth

Sri Lanka’s Central Bank has decided to keep its key policy rates unchanged amidst a moderating inflation, deceleration in the growth of credit obtained by the private sector and a widely expected global economic slowdown.

The Bank in its December policy review says, the inflation which stood at 4.9% during November 2011 was backed by supply side improvements, particularly with respect to agricultural produce which helped to bring down domestic prices.

The Monetary Authority expects that a favorable performance of the domestic agricultural sector in the forthcoming year, coupled with the ongoing improvements to infrastructure including transportation, will help mute inflationary pressures in the period ahead.

The Bank says, the broad money growth was seen moderating in October 2011 to 19.8%, along with a deceleration in the growth of credit obtained by the private sector.

It believes, that this trend is expected to continue in the months ahead, as the increases in domestic market interest rates seen in recent weeks, as well as the widely expected slowing down of the global economy are likely to have a dampening effect on credit growth and therefore monetary expansion.

Central Bank says, the sovereign debt related issues in several advanced economies have led to uncertainty in financial markets and volatility in international commodity prices.

According to the Bank, oil prices continue to remain high with some volatility due to supply constraints following recent geo-political tensions and perceived risks to supplies.

“Reflecting the impact of these developments as well as import demand associated with the robust expansion of domestic economic activity, the deficit in the trade balance of the balance of payments was seen widening over 2011” added the monetary policy statement issued by the bank.

However the Bank says, the continued increases in inflows to the services account, higher inward remittances, inflows to the Government’s financial account, Foreign Direct Investments, inflows to the Commercial Bank and also inflows of short term financing obtained by Commercial Banks is expected to help cushion the gap existing in the balance of payments.

Accordingly, the Bank’s Repurchase rate remains at 7% while its Reverse Repurchase rate remains at 8.50%.