Central Bank holds key interest rates unchanged

Oct 20, 2015 (LBO) - Sri Lanka's Central Bank held key interest rates unchanged on Tuesday after a monthly monetary policy announcement citing low inflation, a decision broadly expected by market participants. A poll by Lanka Business Online of 13 market participants showed 12 expected no change in policy interest rates, while one expected a 25 to 50 basis point hike or a tightening of the Statutory Reserve Ratio. With the policy announcement, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank stay unchanged at 6.00 percent and 7.50 per cent respectively Headline inflation, on a year-on-year basis, declined to -0.3 per cent in September 2015 from -0.2 per cent recorded during the months of July and August 2015. Core inflation, however, ticked up to 4.2 percent. "The impact of the sharp downward adjustments to administratively determined prices at end 2014 and the beginning of 2015, improved domestic supply conditions, favourable global commodity prices and subdued inflation expectations supported the persistence of near-zero levels of headline inflation," a statement said. Gross official reserves, which stood at 6.5 billion dollars at end August 2015, are estimated to have increased to 6.8 billion dollars by end September 2015. "Gross official reserves are expected to increase further during the remainder of the year with the anticipated long term external financial inflows to the government," a statement said. Broad money (M2b) accelerated to 16.8 per cent in August 2015 from 16.2 per cent in the previous month, driven by the expansion of credit to private and public sectors by the banking system. Credit granted to the private sector by commercial banks increased by 21.3 per cent on a year-on-year basis in August compared to the increase of 21.0 per cent in the previous month. "The effects of the policy measures taken by the Central Bank and the government recently to address emerging imbalances in certain sectors of the economy are yet to be reflected in macroeconomic data, although there are some indications that these measures are beginning to take effect," the statement said. On the external front, cumulative spending on imports was 12,559 million dollars during the first eight months of 2015, broadly unchanged from the corresponding period in 2014, while earnings from exports declined by 3.4 per cent to 7,147 million dollars during the same period. The real effective exchange rate indices have also adjusted, supporting the external competitiveness of the economy, the Central Bank said.