Not expecting rise in domestic interest rates: CB

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Mar 05, 2018 (LBO) – Sri Lanka’s Central Bank responding to misleading news reports said it is not expecting a rise in domestic interest rates in the period ahead.

“Based on its current projections, an increase in market interest rate is not expected in the near term,” the bank said issuing a statement regarding false reports.

The recent movements in headline inflation, core inflation, inflation expectations, broad money growth, credit expansion, expansion in economic activity as well as the international reserve position do not justify the view that a rational market would also expect an increase in interest rates.

The reasons cited in the said reports for such expectation are a decline in reserves, higher than expected imports and increased interest rates on government securities.

With the decline in food inflation, headline inflation has reverted to mid-single digit levels faster than expected, while core inflation, which is an indicator of demand driven inflation, has remained subdued.

Inflation expectations, as measured by the Inflation Expectations Survey of the Central Bank, have moderated.

Economic growth has remained below potential, the bank says implying that there is space for aggregate demand to expand without fuelling inflationary pressures.

Both broad money expansion and credit expansion have decelerated to expected levels by end 2017.

Some fiscal sector indicators, such as the primary balance and revenue collection, have shown improvements.

With regard to the external sector, official reserves are currently estimated at around US dollars 7.9 billion compared to US 6.0 billion dollars at end 2016.

The improvement in reserves is recorded on both quantitative and qualitative aspects, with the Central Bank purchasing US 1.7 billion dollars from the domestic market on a net basis in 2017 and US 284 million dollars so far during 2018.

Although recent global market developments and domestic uncertainties attributed to non-economic factors have generated some volatility in the domestic market in the month of February, such volatility is expected to be short lived.

In fact, the foreign exchange market has already stabilised while speculation in the government securities market has also moderated substantially.

As such, the general public is advised not to be misled by false media reports on the Central Bank’s expectations on future behaviour of interest rates.