Sri Lanka Central Bank hikes interest rates by 50 bp

central bank of sri lanka

Feb 19, 2016 (LBO) – Sri Lanka’s Central Bank hiked interest rates after a monthly policy meeting due to risks to the macroeconomy from excessive money supply growth and a continued trend in inflation, a statement said.

The decision surprised the market, with 10 out of 14 economists not expecting rates to go up, according to a Reuters poll.

“In spite of the recent policy measures taken by the Central Bank and some upward adjustments observed in market interest rates, certain risks to macroeconomic stability continue,” the statement said.

“In particular, the Monetary Board was of the view that the excessive growth of broad money fuelled by domestic credit expansion in the midst of continued upward trend in underlying inflation requires pre-emptive policy measures in order to contain further build-up of demand driven inflationary pressures.”

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank were hiked by 50 basis points each to 6.50 percent and 8.00 percent, respectively.

In September the IMF said Sri Lanka’s monetary policy stance was appropriate, but the central bank should look to tighten in the future. The government is seeking balance of payments support from the IMF which may make a decision by March or April.

The tightening may support Sri Lanka’s case.

In the statement, the central bank said broad money (M2b) continued to grow at a high pace, recording a growth of 17.8 percent in December 2015 compared to 13.4 per cent in December 2014.

The year-on-year growth of credit granted to the private sector by commercial banks accelerated during the year, with a growth of 25.1 per cent in December 2015 in comparison to 8.8 per cent in December 2014.

Headline inflation, as measured by the year-on-year change in CCPI decelerated to 0.9 per cent in January 2016, reflecting the impact of low international commodity prices, broadly favourable domestic supply conditions as well as the relatively high base in January 2015, the statement said.

However, year-on-year headline inflation based on the National Consumer Price Index (NCPI, 2013=100) was at 4.2 per cent in December 2015.

“The Central Bank’s decision to increase the Statutory Reserve Ratio (SRR) with effect from 16 January 2016 has permanently absorbed a part of excess rupee liquidity from the domestic money market.”

“The decline in excess liquidity also resulted in market interest rates adjusting upwards. In effect, most market rates have shown adjustments towards the levels observed prior to the reduction in policy interest rates in April 2015.”