Central Bank maintains the policy interest rates unchanged
In a magical move like pulling a rabbit out of a hat, Central Bank (CB) Governor Dr.Indrajit Coomaraswamy announced the Monetary Board’s decision to maintain the policy interest rates unchanged amidst the rapid slide in the rupee, bemusing some economic analysts who predicted a rate hike.
The Standing Lending Facility Rate (SLFR) will be maintained at 8.50 per cent and Standing Deposit Facility Rate (SDFR) at 7.25 per cent because Sri Lanka already has higher nominal and real interest rates, he told a media conference in Colombo on Tuesday.
He noted the main reasons behind this decision were relatively slower growth, moderating money supply and credit growth, contained inflation and tight liquidity conditions.
“Those (foreign) economies have higher growth and they also have lower nominal and real interest rates. We already have a greater tightening bias compared to a lot of countries,” he said.
At this moment a rate increase would not bring new money into the country or encourage investors in the country, he added.
However an economic analyst said this move may take a while to improve the current account because demand is inelastic in the short term. However, if demand is price elastic, then it will cause a relatively bigger increase in demand for exports.
If the country has lost competitiveness in a fixed exchange rate, devaluation could be beneficial in solving that decline in competitiveness, he added.
Sri Lanka which relies on import of raw materials may experience serious costs from the depreciation of the rupee which makes basic goods and food more expensive, he pointed out.
He expressed the belief that the recent policy measures would help in stabilising the rupee soon, adding that no one should panic about the rupee depreciation against the US dollar as the economy is growing with adequate foreign reserves and curtailed inflation.
Forward looking indicators suggest an improvement in the economic performance on the back of the modest recovery in the agriculture sector and continued positive momentum in the industry and services sectors.
Inflation is projected to remain within the 4-6 per cent target range over the medium term, he said adding that foreign reserves stood at US$7.3 billion.
The CB has so far this year intervened with $184 million in forex markets to defend the rupee, he disclosed adding that foreign currency outflows stood at $487 million and the public hue and cry on depreciation of the rupee is unnecessary, he said.