Sri Lanka cuts policy rates: Inflation declines due energy price revision and consumer items:Central Bank

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Apr 15, 2015 (LBO) – Sri Lanka has cut policy rate corridor by 50 basis points lowering its repo rate to 6.00 percent and reverse repo rate to 7.50 percent with effect from today, to boost credit and investment, the Central Bank said.

“Current behaviour of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year,” The bank said.

“Inflation is projected to remain at low mid-single digit level in 2015,”

“Therefore, there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook,”
“The relaxed monetary policy stance will also be pursued during the months 3 to come until concerns over inconsistent behaviour of market interest rates are addressed sufficiently to facilitate the economic growth further in a low single digit inflation environment.”

Inflation eased to 0.01 percent in March 2015 from 0.6 percent in February, the same year.

Following the same trend, annual average inflation also declined to 2.5 per cent from 2.9 per cent recorded in the previous month.

“Significant decline in inflation in March 2015 reflects primarily the first round impact of downward price revisions of domestic energy prices as well as the administratively reduction in prices of a number of consumer items,” the Central Bank said.

Meanwhile, core inflation stood at 1.4 per cent on y-o-y basis and 3.0 per cent on annual average basis in March 2015.

The Central Bank said credit to private enterprises from the banking system increased in past few months and cash flows are expected to improve.

The growth of the private sector credit rose to 12.6 per cent (y-o-y) or 24.5 billion rupees in absolute terms in February 2015.

Reflecting the developments in domestic credit, broad money (M2b) increased by 12.3 per cent (y-o-y) in February 2015, remaining well within the underlying monetary projections.

The regulator says, the external sector remained resilient with foreign currency inflows from export proceeds, workers’ remittances, tourist earnings, inflows to the government securities and portfolio investments supporting maintenance of the exchange rate against US Dollar without an unhealthy volatility on the strength of official foreign reserves increasing from US dollars 6.8 billion as at end March 2015 to US dollars 7.0 billion at present.

Sri Lanka’s official reserves are projected to strengthen further with the proceeds pending from the currency swap arrangement between Sri Lanka and India and other identified regular investment inflows to a level of official reserves comfortable for supporting the exchange rate stability in the immediate future, the bank said.

Overall, the outlook in the balance of payments in 2015 remains favourable with continued inflows expected from current account related transactions, significantly lower expenditure on petroleum imports and receipts to the government, the banking sector and other private corporates.