Sri Lanka Central Bank tightens monetary policy, increases SRR

Dec 30, 2015 (LBO) - Sri Lanka's Central Bank tightened monetary policy on Wednesday citing concerns over expansion in monetary aggregates fueling inflation. The Monetary Board raised the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50 per cent effective from 16 January. The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) was left unchanged at 6.00 percent and 7.50 per cent respectively. The Central Bank last changed the SRR in July 2013 when it reduced the rate by two percentage points. The market was divided with some analysts expecting monetary policy to be left unchanged despite the US Fed raising rates by 25 basis points this month, for the first time in nearly a decade, signaling a period of monetary tightening. "If the current excess liquidity in the domestic money market continues to remain high for an extended period, it could lead to an undue expansion in monetary aggregates, fueling future inflation in the economy," the Central Bank said in a statement. "In that respect, the Monetary Board is of the view that it is appropriate to restrain the build-up of demand-side pressure on inflation to ensure continued monetary and price stability." Credit granted to the private sector by commercial banks increased by a significant 26.3 per cent, year-on-year, compared to 22.2 per cent in the previous month. The year-on-year growth of broad money (M2b) too expanded by 17 per cent in October 2015 compared with 16 per cent in the previous month, "Tentative data for November 2015 also shows that credit flows to the private sector continue to expand at a high rate," the statement said. As a result, inflation CCPI-based core inflation rate rose to 4.3 per cent, on a year-on-year basis, in November 2015 from 4.4 per cent in the previous month. This is compared with its recent low of 0.8 per cent in February 2015. Despite an 8.8 percent depreciation of the rupee against the dollar as an adjustment to the external sector, the Central Bank noted that this adjustment may be insufficient. The trade deficit during the first ten months of the year widened by 2.5 per cent to 6,936 million dollars reflecting the continued increase in non-oil imports. "The Monetary Board is of the view that external sector policies already implemented need to be further supported by some monetary policy tightening." A regular media briefing has been scheduled for Thursday morning by the Central Bank to provide further information in relation to the state of the economy and the monetary policy decision.