Central Bank of Sri Lanka keeps key interest rates at current levels – the Island
Monetary Policy Review: No. 08 – November 2021
The Monetary Board of the Central Bank of Sri Lanka, at its meeting on November 24, 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 noted the recent acceleration in inflation, mainly due to supply disruptions and soaring world commodity prices, and reaffirmed its commitment to maintain inflation at target levels over the medium term with appropriate measures, while helping the economy to reach its potential in the period ahead.
Sri Lankan economy is gradually recovering The Sri Lankan economy experienced a strong recovery in the first half of 2021, supported by fiscal and monetary stimulus measures. The re-emergence of the COVID-19 pandemic and the resulting disruptions to production activities appear to have somewhat affected the recovery underway in the third quarter of 2021. However, available high-frequency indicators suggest that economic activity is returning. quickly to normal. The removal of lockdown measures related to COVID-19 in October 2021 and the successful roll-out of the COVID-19 vaccine nationwide would help activity in the coming period. While real GDP growth is projected at around 5% in 2021, the continued increase in COVID-19 infections both globally and nationally could impact this expectation to some extent.
External sector remains resilient in the face of strong headwinds Merchandise export revenues remained strong, registering more than US $ 1 billion for the fourth consecutive month in September 2021. Preliminary data shows that merchandise exports registered a record high in October 2021. Import spending also increased, widening the trade deficit in the nine months ending September 2021 compared to the corresponding period the previous year.
The tourism sector has shown strong signs of recovery with the easing of restrictions. Despite moderate inflows due to workers’ remittances in recent months, a rebound is expected in the coming period with the continued increase in worker migration and efforts to facilitate remittance flows through formal channels.
The depreciation of the Sri Lankan rupee against the US dollar is recorded at 7.2% so far in 2021. The exchange rate has remained stable at around Rs200-203 against the US dollar for the past three month. At the same time, gross official reserves were estimated at US $ 2.3 billion at the end of October 2021. However, this does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of US $ 10 billion. of CNY (equivalent to approximately US $ 1.5 billion). In addition, measures taken by the government and the Central Bank to attract new foreign currency inflows, as well as expected inflows into the private sector, including the financial sector, are expected to increase gross official reserves, thereby strengthening the external sector in the period to come. . Concretely, a greater conversion of export earnings is observed, while negotiations with foreign counterparts from the Government and the Central Bank are progressing, generally in line with the path envisaged in the half-yearly roadmap.
Market interest rates rose, reflecting the pass-through of restrictive monetary conditions. In response to restrictive monetary and liquidity conditions, most market lending rates have adjusted upward. Yields on government securities, which rose significantly, stabilized with stronger subscriptions at primary auctions, reflecting improving market sentiment. At the same time, credit to the private sector, which has grown in particular thanks to the easing of monetary conditions, slowed down somewhat in September 2021.
However, data for the nine months ending September 2021 indicate that credit flows, particularly to the industrial and service sectors of the economy, have improved significantly, thereby supporting the recovery of the economy. . In the meantime, public sector credit from the banking system, especially net credit to the government, continued to expand. Overall, the growth of broad money (M2b) slowed in September 2021, in line with the moderation of credit to the private sector and the decline in the net foreign assets of the banking system.
Inflation has accelerated recently, mainly due to supply side disruptions and soaring international commodity prices Supply side disruptions, removal of domestic price controls and Upward adjustments in several administratively determined prices to reflect rising global prices for energy and other commodities as well as the gradual strengthening of aggregate prices under demand conditions, have recently pushed inflation above target levels. A further acceleration in headline inflation is possible in the immediate future, although these movements are expected to be transitory. The monetary policy measures already taken by the Central Bank will help to curb excessive demand pressures and prevent the build-up of unfavorable inflation expectations.
Key rates are maintained
at current levels
In view of the current and expected macroeconomic developments described above, the Monetary Board has found the current key interest rates to be appropriate. Nevertheless, the Central Bank will remain vigilant and will continue to monitor national and global macroeconomic and financial developments and take appropriate measures, as necessary, with the aim of ensuring the stability of the external sector, keeping inflation in the desired range and support sustained economic recovery.