The Monetary Board of the Central Bank (CB) which includes the CB Governor and the Treasury Secretary, has introduced new changes to the country’s monetary policy based on a stable economic situation, the CB said in a statement issued on Wednesday.The board at its 27th December 2013 meeting decided to adopt the following monetary policy [...]

The Sundaytimes Sri Lanka

Changes in Central Bank monetary policy based on stable econ situation


The Monetary Board of the Central Bank (CB) which includes the CB Governor and the Treasury Secretary, has introduced new changes to the country’s monetary policy based on a stable economic situation, the CB said in a statement issued on Wednesday.The board at its 27th December 2013 meeting decided to adopt the following monetary policy measures:

1. The Monetary Board decided to establish a Standing Rate Corridor (SRC) in place of the current Policy Rate Corridor with immediate effect. Accordingly, the following changes will take place:

a. The current Standing Repurchase Facility will be renamed as the Standing Deposit Facility (SDF), and the Standing Deposit Facility Rate (SDFR) will be the rate for the placement of overnight excess funds of the banking system

b. The current Standing Reverse Repurchase Facility will be renamed as the Standing Lending Facility (SLF), and the Standing Lending Facility Rate (SLFR) will be the rate for the lending of overnight funds to the banking system

c. Open Market Operation (OMO) auctions will continue unchanged, with Repurchase and Reverse Repurchase auctions, depending on liquidity conditions in the domestic money market

2. The Monetary Board was of the view that the requirement of providing collateral by the Central Bank to OMO participants under the Standing Deposit Facility was unnecessary, since the Central Bank is the monetary authority of the country. Accordingly, in consideration of the Central Bank’s zero credit risk in rupee transactions, the Monetary Board decided that, with effect from 1st February 2014, the Standing Deposit Facility will be un-collateralised. However, all other OMO transactions will remain collateral-based, as at present.

3. The Monetary Board also observed that the volatility in the interbank call money market has reduced substantially over time, and was of the view that a compression of the Standing Rate Corridor is now warranted. Accordingly, the Monetary Board decided to reduce the Standing Lending Facility Rate of the Central Bank by 50 basis points to 8 per cent with immediate effect, thereby compressing the Standing Rate Corridor to 150 basis points from the current 200 basis points. It is expected that this compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to their customers.

The statement said that the continued easing of monetary policy through 2013 amidst low and stable inflation has brought about the desired macroeconomic outcomes. Both current and capital accounts of the Balance of Payments (BOP) improved, resulting in a stronger exchange rate and an international reserve position.

Responding to the reduction in market interest rates and improved business confidence, credit obtained by the private sector from commercial banks increased by Rs. 22.2 billion during the month of November 2013 following the increase of Rs. 27.2 billion observed in October. Accordingly, in addition to the funds raised by the private sector through domestic and international debt and equity markets and borrowing from other domestic financial institutions, credit extended by commercial banks to the private sector during January-November 2013 amounted to Rs. 160.6 billion. Public corporations continued to repay the banking sector for the third consecutive month, resulting in credit to public corporations declining by Rs. 18.8 billion in November 2013. Net credit to the Government also declined by Rs. 3.5 billion during the month, as expected.

In the external sector, earnings from exports, which increased by 24.7 per cent (Y-o-Y) in November 2013, exceeded US$1 billion for the second consecutive month, resulting in cumulative earnings of $9.4 billion during January-November 2013. With cumulative expenditure on imports declining by 2.5 per cent to $17.2 billion, the cumulative trade deficit contracted by 10.7 per cent to $7.8 billion during the period. Increased inflows from services exports and workers’ remittances strengthened the current account further while substantial foreign capital inflows resulted in the BOP recording a surplus of over $700 million in 2013 compared to the surplus of $151 million in 2012. Reflecting the improved external sector performance, Gross Official Reserves increased to $7.1 billion (provisional) by end 2013.

Lanka’s annual average inflation 6.9 % in 2013

Sri Lanka’s annual average rate of inflation decelerated to 6.9 per cent in December 2013, for the seventh consecutive month, the Central Bank (CB) said on New Year’s Eve.

The contribution to the decline in annual average inflation to 6.9 per cent in 2013 came mainly from slowdown in the price increase in the Non-food category, which grew only by 6.1 per cent in 2013 against that of 10.0 per cent in 2012.

Meanwhile inflation, which was contained within single digit levels for nearly five consecutive years, decelerated significantly to reach ‘benign’ mid-single digit levels in December 2013, the CB said, noting that “this is the longest period that inflation has remained at single digit levels, after the economy was liberalized”.

Year-on-year headline inflation, as measured by the Colombo Consumers’ Price Index (CCPI) fell to 4.7 per cent in December 2013 against 9.2 per cent in December 2012, improving business and investor confidence. It was the lowest level recorded since March 2012.

The CB statement said that the impact of the upward price revision of petrol, diesel, kerosene and bus fares on inflation was lower in 2013 than in 2012. As a result, the average price in the Transport sub-category increased only by 4.6 per cent. In addition, comparatively lower increase in the average prices in the sub-categories of Health (by 1.7 per cent); Furnishing, Household equipment and routine household maintenance (by 4.0 per cent); and Clothing and footwear (by 5.4 per cent) in 2013 than in 2012 contributed favourably to this decline. However a relatively high increase in the Food and non-alcoholic beverages category by 7.9 per cent in 2013 compared to 2012 had an upward pressure on inflation.

“Core inflation, which captures underlying long-term trend of inflation, also moved on a declining path in 2013 to record the lowest figure since its inception in 2007. The year-on year core inflation has declined steadily, reaching its lowest at 2.1 per cent in December 2013 compared to 7.6 per cent in December 2012. The annual average core inflation also continued to decline since mid-2013 and reached 4.4 per cent by December 2013. This favourable development is a reflection of the effectiveness of prudent demand management policies of the Central Bank which have been implemented successfully in containing price pressure emanating from the demand side,” the CB statement noted.

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