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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Central Bank paints economy positive

Central Bank paints economy positive

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1Central Bank paints economy positive Empty Central Bank paints economy positive Thu Nov 17, 2011 9:33 am


Vice President - Equity Analytics
Vice President - Equity Analytics

Exports, imports up in Sept; Healthy financial inflows
Two commercial banks infuse $ 250 m capital from overseas sources; corporate offshore debt capital raising tops $260 m
Private sector borrowing averages Rs. 37 b per month in 2011
CB leaves policy rates unchanged for 10th straight month despite benign inflation and the inflation outlook
Urges for automatic domestic fuel price adjustments in tandem with global market rates
Likely to leave doomsayers dumbfounded, the Central Bank yesterday reaffirmed that the outlook for the economy remains positive and the country was on course to high growth trajectory.
This upbeat assessment came following the conclusion of the November monetary policy review which kept policy rates unchanged for the tenth consecutive month. The latter was despite falling inflation up to October though the bank expects recent upward revision of fuel prices to have a one-off impact.
“The outlook for Sri Lanka’s economy remains positive with the economy continuing along the high growth trajectory,” the Central Bank said in its statement yesterday.
Inflation decreased for the third consecutive month in October 2011 with the year-on-year change in the Colombo Consumers’ Price Index (CCPI) (2006/07=100) declining substantially from 6.4% in September to 5.1% in October 2011.
Annual average inflation decreased from 7.2% in September to 7.1% in October 2011. Further, core inflation, on a year-on-year basis, declined from 6.9% in September to 5.6% in October 2011, signifying the absence of demand-driven inflationary pressures.
Inflation is expected to continue to decrease during the rest of the year, benefitting from the improvements in domestic supply conditions, arising from the high growth momentum of the economy. The fuel price adjustment carried out at end October, and likely corresponding adjustments of costs relating to public and goods transportation, could cause a marginal upward movement in prices.
However, going forward, adjusting domestic fuel prices to reflect persistently high international market prices would minimise the adverse impact on future inflation and the economy through reduced price distortions.
Based on provisional data, earnings from exports as well as expenditure on imports grew further on a year-on-year basis in September 2011. The growth of the latter was mainly due to higher imports of intermediate and investment goods, which included project related imports funded through financial inflows to the government that amounted to US dollars 1,460 million (excluding proceeds from the international sovereign bond issue in July 2011) during the first three quarters of the year.
Even though the deficit in the trade account has expanded, higher earnings from tourism, increased worker remittances as well as other inflows to the services account helped contain the impact of the trade deficit on the current account balance.
In the meantime, during the past month, two commercial banks have made arrangements to infuse fresh capital to the value of US dollars 250 million from foreign sources, while approval has been granted to 12 private companies to raise debt capital of approximately US dollars 63 million from foreign sources during the past two months in addition to foreign debt capital amounting to approximately US dollars 197 million obtained by 14 corporates up to mid-September 2011.
Notwithstanding the above developments, the growth in broad money (M2b) continued into September 2011, with the year-on-year growth remaining high at around 20.7% since June 2011. The rapid expansion of credit obtained by the private sector, which has increased by over Rs.37 billion on average per month in 2011, continued to fuel the growth of money supply.
Also contributing to the monetary expansion was the increase in net credit to the government by the banking sector.
Considering the above, even though inflation and the inflation outlook remain benign, the Monetary Board is of the view that a change to the existing monetary policy stance is not warranted. Hence, at its meeting held on 15 November 2011, the Monetary Board decided to maintain the policy interest rates of the Central Bank and the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks at their current levels. Accordingly, the bank’s Repurchase rate and the Reverse Repurchase rate will be 7.00% and 8.50%, respectively, while the SRR will be at 8.00%.
Reuters said the rate at present is a six year low.
Central Bank Governor Ajith Nivard Cabraal had told Reuters on Wednesday that easing inflation had caused the monetary board to consider reducing the rates at its November meeting on Tuesday, but then it decided to hold off for now.
“Because of high credit growth, we were a little cautious. So we did think to watch a little bit further without being too quick,” Cabraal told Reuters. “We don’t see a demand-driven pressure. But a clear increase in credit, more than we had envisaged, tells us that being cautious wouldn’t hurt.”
Cabraal said he expects annual inflation to remain between 4-6 percent.
Despite the rates staying steady, the central bank has raised the benchmark 91-day treasury bill yield by 28 basis points to 7.39 % within two months from Sept. 21. The yields in 182- and 364-day T-bills have been raised by 25 and 33 basis points, respectively, in the same period.
Analysts said Tuesday’s decision to hold rates would help economic stability.
“This is to give a positive perception on the interest rate outlook,” said a private bank analyst.
The rupee did not move after the policy rate announcement as it has been maintained steady by the central bank.
The release of the next regular statement on monetary policy will be on 20 December 2011.

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