The new Government’s Monetary Board yesterday signalled an apparent thumbs-up for economic prospects and maintained the status quo of the previous regime in terms of policy rate amidst low inflation and a rebound in credit growth.
Just three weeks in office may explain the use of the wordings of the first monetary policy review statement of the new administration but the optimism, cautious or otherwise, comes a day after the Finance Minister claimed the Government has inherited a “scary” economic situation.
However, in the statement following the Monetary Board meeting on Monday, the first chaired by newly-appointed Central Bank Governor Arjuna Mahendran, no doom or gloom was predicted though tomorrow’s presentation of the mini-Budget by the new Government may shed greater clarity on the actual health of the economy as well as its prospects.
Despite allegations of cooked-up economic data by the then-Opposition, yesterday the Monetary Board statement acknowledged low inflation, one of the longstanding achievements which the previous administration often trumpeted.
It also noted that the economy grew by 7.7% during the third quarter of 2014 supported by strong performance in the Industry and the Services sectors.
Analysts said it was too early to expect a proper assessment of the data or the real economy hence the status quo was maintained.
Following the review, the Monetary Board kept record low policy rates unchanged for the 12th consecutive month.
Reuters reported that the market had expected the Central Bank to scrap the lower repo rate and revise some economic indicators. However, the Monetary Board statement said that “with appropriate macroeconomic policies to boost domestic and foreign investor confidence, the Sri Lankan economy is expected to record a robust performance in the period ahead.”
It said inflation will dip further due to last week’s reduction in fuel prices and planned reduction in administered prices of other key commodities. It also acknowledged that private sector credit growth has improved at a “healthy” pace and the increasing trend could be sustained throughout 2015 providing the necessary impetus to the growth momentum of the economy.
Thumbs
Following is the full statement of the January Monetary Policy Review.
In December 2014, headline inflation on a year-on-year basis was at 2.1% compared to 1.5% in the previous month. Core inflation, which directly measures underlying price pressures, continued to remain between 3-4% while decelerating to 3.2% in December 2014 from 3.6% in November.
While low inflation is mainly attributable to contained demand pressure in the economy, it was also supported by favourable supply side developments, particularly the downward revisions in domestic energy prices in the last few months of 2014.
Subdued demand pressure and inflation expectations in the economy, the favourable impact of further reductions in fuel prices in January 2015, and the expected reduction of administered prices of other key commodities announced in the Government’s 100-day program are expected to reduce inflation further in the months ahead.
Supported by historically low market interest rates in nominal terms, credit obtained by the private sector from commercial banks continued to expand at a healthy pace.
Credit flows to the private sector increased by 6.5% on a year-on-year basis in November 2014, while in absolute terms the increase was Rs. 57.8 billion during the month, bringing the cumulative credit flows to the private sector to Rs. 147.4 billion during January-November 2014.
Credit granted against immovable property, plant and machinery, personal guarantees and promissory notes, and other securities as well as unsecured loans increased substantially in November 2014.
It is expected that the increasing trend in private sector credit disbursements can be sustained throughout 2015 providing the necessary impetus to the growth momentum of the economy.
Looking at the real sector, the Sri Lankan economy grew by 7.7% during the third quarter of 2014 supported by strong performance in the Industry and the Services sectors.
The Industry sector, which posted a growth of 12.4% in the first half of 2014, maintained its growth momentum in the third quarter recording an expansion of 12.6%. The performance in the Industry sector was supported by the significant growth observed in the construction, manufacturing and mining and quarrying subsectors.
In the meantime, the Services sector grew by 7.0% while the Agriculture sector, which was hampered by weather related disruptions, contracted by 2.0%.
With appropriate macroeconomic policies to boost domestic and foreign investor confidence, the Sri Lankan economy is expected to record a robust performance in the period ahead.
Taking the above developments in the economy into consideration, the Monetary Board at its meeting held on 26 January 2015, was of the view that the current monetary policy stance is appropriate, and accordingly, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank of Sri Lanka unchanged at 6.50% and 8.00%, respectively. Access to the Standing Deposit Facility (SDF) will remain rationalised.
The date for the release of the next regular statement on monetary policy would be announced in due course.