CB says economy improving

• Private sector credit up 12.6% or Rs. 24.5 b in Feb.
• External sector resilient
• Reserves at $ 7 b; projected to strengthen further
• Outlook in the Balance of Payments in 2015 remains favourable

The Central Bank on Wednesday said that the external sector remained resilient with a favourable outlook on Balance of Payments whilst private sector credit remains on the up.
The positive assessment was revealed in a statement issued on Wednesday following the April monetary policy review held last Saturday.
Following are excerpts from the Central Bank statement. The Monetary Board at its regular meeting held on 11 April 2015 reviewed the current monetary policy stance and underlying macroeconomic conditions. Accordingly, the Monetary Board made following observations:
Headline inflation, on a year-on-year (y-o-y) basis, declined to 0.1% in March 2015 from 0.6% in February 2015. Following the same trend, annual average inflation also declined to 2.5% from 2.9% recorded in the previous month.

 

 
Significant decline in inflation in March 2015 reflects primarily the first round impact of downward price revisions of domestic energy prices as well as the administratively reduction in prices of a number of consumer items.
Meanwhile, core inflation stood at 1.4% on y-o-y basis and 3.0% on annual average basis in March 2015.
As expected, a sustained increase in credit granted by commercial banks to the private sector was observed in the past few months. The growth of the private sector credit rose to 12.6% (y-o-y) or Rs. 24.5 billion in absolute terms in February 2015.
Reflecting the developments in domestic credit, broad money (M2b) increased by 12.3% (y-o-y) in February 2015, remaining well within the underlying monetary projections.

 

 
The external sector remained resilient with foreign currency inflows from export proceeds, workers’ remittances and tourist earnings as well as inflows to the government securities and portfolio investments supporting maintenance of the exchange rate against the US Dollar without an unhealthy volatility on the strength of official foreign reserves increasing from $ 6.8 billion as at end March 2015 to $ 7 billion at present.
The official reserves are projected to strengthen further with the proceeds pending from the currency swap arrangement between Sri Lanka and India and other identified regular investment inflows to a level of official reserves comfortable for supporting the exchange rate stability in the immediate future.
Overall, the outlook in the balance of payments in 2015 remains favourable with continued inflows expected from current account-related transactions, significantly lower expenditure on petroleum imports and receipts to the Government, the banking sector and other private corporates.

Monetary Board admits market rates have behaved inconsistently The Monetary Board has admitted that market rates have behaved inconsistently, raising its own concerns as well as triggering a surprise policy rate cut on Wednesday though the move was linked to stimulating the economy further. “The current behaviour of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year,” the Central Bank said following the April monetary policy review meeting. “Inflation is projected to remain at a low mid-single digit level in 2015. Therefore, there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook,” the bank said in its statement released on Wednesday.     “If any of the subsequent interim effects of further monetary relaxation are found to be of concern over other economic variables, a mix of other monetary policy tools is available to fine-tune such effects towards achievement of current objectives of the monetary policy,” it added. At its meeting on Saturday, 11 April, the Monetary Board decided to reduce the policy interest rates by 50 basis points. Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank are reduced to 6.00% and 7.50% respectively with effect from 15 April 2015. “The monetary policy tool primarily adopted by the Monetary Board will continue to be the policy interest rates announced to the market with the support of other monetary policy tools. The relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behaviour of market interest rates are addressed sufficiently to facilitate the economic growth further in a low single digit inflation environment,” the Central Bank added.

 

CB rejects all bids at 50-month T.Bond auction Central Bank yesterday rejected all bids at a 50-month t-bond auction to raise Rs. 5 billion. The Central Bank did not give any reason for the rejections. The auction received total bids worth Rs. 26.8 billion. The coupon rate indicated was 10.6%. In secondary bond markets, yields were seen increasing during morning hours of trading yesterday leading to the Treasury Bond auction. However, following the outcome of the auction at where all bids were rejected, the first such occurrence in five years, yields was seen tumbling once again on the back of buying interest. See also Page 5