Sri Lanka wants to maintain rates at current levels: CB Governor

Feb 25, 2016 (LBO) - Sri Lanka's central bank governor hopes interest rates can be maintained at current levels, after a 50 basis point rate hike last week, but this will be determined by external factors, he said. The island's policy rates are at 6.5 percent and 8 percent, while 10-year treasury bond yields have increased to 11.
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75 percent. "We will certainly try our best to keep interest rates at this level, and not let them escalate much further, but it is to a large extent determined by international trends," Governor Arjuna Mahendran said, speaking to media on the state of the economy.
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Emerging markets continue to experience foreign selling, according to him.

First it was in anticipation of a US rate hike. Now its Middle Eastern sovereign funds liquidating positions to cover low oil revenues.
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"If this selling continues for many more months to come, then we will have to consider further rate hikes ahead. So I won't rule it out." The 50 basis point rate hike also took capital flows into account. "This is a factor we have looked at in order to induce investors to keep their money in Sri Lanka. We have to offer higher returns.
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Raising interest rates ensures the currency stabilizes," he added. Last week's rate hike was also motivated by growth in bank lending running at 25 percent. Once growth runs beyond 15 percent, he is bound by law to write to the finance minister with an explanation.
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"We had to resort to this unfortuate interest rate hike last week. The basic issue is that growth of bank lending is running at about 25 percent." "It is a good thing, and a sign of confidence, when banks are willing to lend and people are willing to borrow. But you don't want it to get out of control.
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We don't want a credit bubble that creates more problems than it solves.
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" Sri Lanka's economic growth is running above 5 percent and Mahendran suggested that economic growth would continue to be a priority. Monetary policy, in that sense, would support this.
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BKVWHK
BKVWHK
8 years ago

A little more … just a little more easing on the interest rates. Another 50bps to 100 bps. Keep going, it is necessary. The alternative will cause much pain.

Tilak
Tilak
8 years ago

This is called the central bankers delema world over.Consider a patient with many ailments.High blood pressure ,Cronic kidny dieses, Diabetes & High clorostol levels.Medicine for blood pressure & Diabetes is adverse for kidny ,whilst heavy treatment for clorostol could affect kidny & the liver & sugar control ect ..Combinations & permutations are many.Bottom line is every ailment could be life threatening & needes to be controlled.So we come back to fundamentals.Nothing is more valuable than maintaining good general health.Those fruits we did not eat,those alchoholes we gulped down with sugar buns in business meetings with less plant based foods have caused serious damage during the carnival season of our life..More weaker the general health for whatever the reasons obviously less choices the doctor ( Banker here) has.What is good for Balance of payments can be bad for the Growth ,What is good for growth is bad for BP ,Inflation(if there is)ect ect.So eventually we come to the fundamental issue (truth)of the value of maintaining good economic health & what habits we should have dropped decades ago & what to keep & how to defend our self from adverse environmental issues.A difficult task that needs to be done.How best is the billion $ evasive answer for many many countries @ this moment.

Nirmalan Dhas
Nirmalan Dhas
8 years ago

Many external factors are actually internal. Good governance for instance is an internal factor but it plays a strong role in determining how the islands economy is perceived by investors. Good governance is not something that is clearly defined but it includes the extent to which arbitrary use of power is curtailed and contained by the law. In this respect a small island that has gone through a period of irrational and autocratic governance and which continues to place its presidency above the law is not very attractive. When it is known that on that same island large areas of land have been “occupied” by the state or the owners of the land prevented from exercising their ownership over it, then investors look upon what is going on with some suspicion.

When there is a growing sense that something is being hidden and that wrongdoers are being intentionally allowed or even helped to slip away from the long arm of the law then what is perceived is a subversive and lawless state pretending to be a law abiding one in the hope of being rewarded. When there is a smile behind which lurks a snarl directed at the global civilization of the human species the humans detect a strong undertow of – you guessed it – animal blood; and this can lead to economic difficulties unless remedied. The bond issue hanging over the governors head does not help and neither does the boozy billions that are being talked about in the cocktail circuit.

If we are prepared to clean up the state, send the actors and showmen home and let those who would like to build a functional state and a civilized society do what they can do, then of course, investment in specific strategic mechanisms will surely come our way. It is best not to even try to think of what may happen if we are not.

ajith
ajith
8 years ago

There will be no alternative than resorting to “tight monetary policy path” to control the situation when fiscal front of the economy is battling like current scenario in SL. I expect at least 1.5-2% escalation in policy rate toward the end of the year, under the current scenario.

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