CB says economy, markets stable
The Central Bank yesterday indicated that the economy and markets, especially money, are stable, encouraging it to leave policy rates unchanged at its September monetary policy review.
It said inflation continued to moderate with the year-on-year change in the Colombo Consumers’ Price Index declining from 7.0% in August to 6.4% in September 2011.
Annual average inflation increased marginally from 7.1% in August to 7.2% in September.
Meanwhile, core inflation, on a year-on-year basis, also declined from 7.8% in August to 6.9% in September. Inflation on a year-on-year basis is expected to continue to moderate during the remainder of 2011, with the continuous improvements in domestic supply conditions supported by the high growth momentum of the economy as well as the expected moderation of international commodity prices.
Excess liquidity in the domestic money market has declined gradually to a more desirable level and the Central Bank recommenced the daily repo auctions under open market operations on 19 September with the intent of smoothing market interest rates.
Irrespective of the market being in overall excess, some upward pressure on short-term market interest rates was observed in the first week of October, and the Central Bank swiftly intervened through reverse repo auctions to facilitate the smooth operation of the market.
However, this situation was temporary and the short-term rates returned to normalcy by 7 October 2011.
As per provisional data, both earnings from exports and expenditure on imports grew further on a year-on-year basis in August 2011.
Increased remittances, higher earnings from tourism, as well as other inflows to the services account continue to cushion the impact of the trade deficit on the overall balance of the Balance of Payments.
Substantial amounts of foreign inflows on account of direct investments, equity investments and other inflows to the private sector are expected during the remainder of the year.
The recent announcement of the discovery of natural gas deposits in the Mannar basin – although further research is required to assess its commercial viability – is likely to raise investor attention on Sri Lanka further.
The high rate of expansion in broad money supply (M2b) continued, recording a year-on-year growth of 20.6% in August 2011. The year-on-year increase of credit to the private sector in August was 34.1%.
Credit extended to the private sector has been increasing by around Rs.36 billion on average per month in 2011 reflecting continued expansion of economic activity.
Meanwhile, the increase in net credit to the Government by the banking sector also contributed to the monetary expansion. However, the growth of money supply is expected to moderate in the period ahead given the decline in excess liquidity in the money market.
Considering the above, the Monetary Board, at its meeting held on 10 October 2011, decided to maintain the policy interest rates of the Central Bank at their current levels. Accordingly, the bank’s Repurchase rate remains at 7.00% while the Reverse Repurchase rate remains at 8.50%. The release of the next regular statement on monetary policy will be on 8 November 2011.
