Sri Lanka key interest rates held unchanged in monetary policy review

banking

Aug 31, 2015 (LBO) – Sri Lanka’s Monetary Board held key interest rates unchanged on Monday citing low inflation, steady foreign remittances and earnings from tourism. Dollar inflows expected to bolster foreign reserves contributed to the decision, the monetary authority said.

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank were held unchanged at 6.00 per cent and 7.50 per cent respectively.

The decision was expected by a majority of bank dealers. This is despite the prospect of a rate hike in the US this year, and the unexpected move by China to cut interest rates by 25 basis points this month.

“Going forward, the inflation outlook and expectations remain favourable for the remainder of the year, supported by improved domestic supply conditions and subdued global commodity prices,” the monetary board said.

Deflation was 0.2 percent in August, for a second consecutive month, on a year-on-year basis. Core inflation “which reflects the underlying price movements in the economy” increased to 3.9 per cent in August from 3.5 per cent in the previous month, on an year-on-year basis, it said.

“Although some pressures in short term interest rates were observed along with declining liquidity levels in the domestic money market, most market interest rates continue to remain at low levels.”

Credit to the private sector by commercial banks grew 19.4 percent in June compared with 17.6 percent in May, supported by low interest rates.

“The rapid increase in the imports of consumer durables including motor vehicles driven by credit available at low interest rates, among other things, has raised some concerns,” the monetary authority noted.

In the monthly policy statement, the board said it is closely monitoring these developments in order to ensure that credit continues to be available to support productive economic activity while avoiding excessive expansion in credit in the period ahead.

Despite a widening of the trade deficit, remittances from workers abroad and tourism earnings have supported the current account.

Official reserves were expected to increase during the remainder of the year with higher inflows arising from improved business outlook and investor confidence, it noted.

“The realisation of the remaining proceeds of the currency swap arrangement with the Reserve Bank of India (RBI) amounting of US dollars 1.1 billion and long term financial flows to the government, including the planned term loan of US dollars 500 million,” will support official reserves, the monetary board said.