Central Bank maintains key interest rates at current levels – adaderana biz english
The Monetary Board of the Central Bank of Sri Lanka, at its meeting on October 13, 2021, decided to maintain the Permanent Deposit Facility (SDFR) rate and the Permanent Loan Facility (SLFR) rate of the Bank. central at their current levels of 5.00 percent and 6.00 percent, respectively. The Council arrived at this decision after carefully considering macroeconomic conditions and expected developments on the national and global fronts. The Council reiterated its commitment to keep inflation at target levels over the medium term with appropriate measures, while helping the economy to reach its potential in the coming period.
The global economy continues to recover
The global economic recovery is expected to continue despite large disparities between countries. According to the World Economic Outlook (WEP) of the International Monetary Fund (IMF) published on October 12, 2021, the world economy is expected to grow by 5.9% in 2021 and 4.9% in 2022. The economic outlook remains diverging from country to country, mainly due to disparities in access to COVID-19 vaccines and political support. Consumer price inflation in most countries has increased dramatically, reflecting the impact of pandemic supply-demand mismatches and soaring commodity prices, relative to their low base. from a year ago.
Sri Lankan economy grows despite pandemic disruption
According to estimates by the Census and Statistics Department (DCS), the Sri Lankan economy experienced a strong recovery in the second quarter of 2021, recording real growth of 12.3% year-on-year, after growing 4 , 3%. %, year-on-year, in the first quarter of 2021. With the gradual return to normal after the phasing out of lockdown measures related to COVID-19, alongside the successful roll-out of the COVID-19 vaccination program and policy measures to support for growth, the dynamics of economic activity should be maintained over the coming period. The available indicators and projections suggest that the real economy will grow by around 5% in 2021 and gradually shift to a high and sustained growth path over the medium term, following the short-term stabilization measures put in place by the government and the Central Bank.
The coordinated efforts planned by the government and the Central Bank are expected to strengthen the external sector in the coming period.
Export revenues marked a noticeable improvement and recorded more than $ 1 billion for the third consecutive month in August 2021. Import spending also increased, partly reflecting the surge in world commodity prices, leading to an increase in the trade deficit in the eight months ending August 2021, over the corresponding period last year. Tourism outlook improves
with the relaxation of worldwide travel restrictions and the successful nationwide vaccination campaign. Despite the moderation in workers’ remittances observed in recent months, a rebound is expected in the coming period with improved growth prospects for the main source countries of foreign jobs and greater stability of the domestic foreign exchange market. . The realization of foreign investments in the real sector and the timely adoption of corrective measures by the Central Bank as set out in “The six-month roadmap to ensure the stability of the macroeconomic and financial system” are gradually easing pressures on the domestic foreign exchange market. In addition, the Central Bank continued to intervene in the foreign exchange market to provide liquidity for essential imports, including fuel. The depreciation of the Sri Lankan rupee against the US dollar is recorded at 6.8% so far in 2021. The Sri Lankan rupee remains largely undervalued, as evidenced by indices of the real effective exchange rate (REER ). Meanwhile, gross official reserves were estimated at US $ 2.6 billion at the end of September 2021. However, this does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of US $ 10 billion. CNY (equivalent to about 1.5 billion). Gross official reserves are expected to improve thanks to measures taken by the government and the Central Bank to attract new foreign currency inflows, as indicated in the Six month roadmap, thus strengthening the stability of the external sector in the coming period.
Market interest rates have adjusted upward in response to tighter monetary and liquidity conditions, while credit and monetary expansion have remained high
In response to the tightening of monetary policy in August 2021, most of the market deposit and credit rates adjusted upward. In addition, government bond yields saw a sharp upward adjustment with the removal of maximum acceptance rates at primary auctions. As a result of these upward adjustments, greater stability in market interest rates is expected over the coming period. Reflecting the increased demand for credit in a low interest rate environment, credit to the private sector increased as expected over the eight months ending August 2021. The momentum of credit expansion is expected to continue during the remainder of the year, with the recovery in economic activity and continued efforts to channel credit flows to productive and needy sectors of the economy. At the same time, the credit obtained by the public sector from the banking system, in particular the net credit to the government, also increased significantly in the eight months ending in August 2021. With the increase in domestic credit, the growth of broad money (M2b) remained high.
Some inflationary pressures are observed, in particular due to emerging developments in world prices
Inflation has accelerated in recent months due to high food inflation and some acceleration in non-food inflation. Soaring world commodity prices prompted the government to remove maximum retail prices for several essential commodities. Along with the resulting upward adjustments in other market prices, headline inflation is likely to deviate somewhat from target levels in the near term. While such short-term supply side developments do not justify a tightening of monetary policy, the actions already taken by the Central Bank on interest rates and market liquidity would help stabilize demand pressures. medium term.
Policy rates are maintained at current levels
In view of the current and expected macroeconomic developments outlined above, the Monetary Council considered the current level of key interest rates to be appropriate. The Central Bank will continue to monitor domestic and global macroeconomic and financial markets
developments and stand ready to take appropriate action, as appropriate, with the aim of keeping inflation within the desired range under the flexible inflation targeting framework over the medium term, while supporting and supporting the economic recovery.
|Monetary policy decision:||Policy rates and SRR unchanged|
|Permanent deposit facility rate (SDFR)||5.00%|
|Permanent loan facility rate (SLFR)||6.00%|
|The bank rate||9.00%|
|Statutory reserve ratio (SRR)||4.00%|