Feb 03, 2014 (LBO) – Sri Lanka’s private credit is expected to pick up from this quarter, based on historical trends, but there could be a delay, Standard Chartered Bank said, as credit slowed following a balance of payments crisis. The report said further monetary easing should be viewed cautiously as it could generate currency instability risks.
However some analysts say any rate cuts that are not imposed with central bank credit (printed money or reverse repo activity) and are driven by real market conditions would not create much instability.
“If we do not see an improvement in private-sector credit growth or if headline inflation continues to fall at end Q1-2014,” the CBSL could cut policy rates further, the report said.
“We think the CBSL is likely to put higher weight on private-sector credit growth.”
Following a balance of payments crisis and weak credit, liquidity builds up in the banking system mostly due to central bank purchases of dollars, which are not loaned out to generate imports quickly.
This can lead to a narrower trade and external current account deficit giving an opportunity for the central bank to build up foreign reserves by mopping up the liquidity. “Historically, there has been a on