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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » CB cools off inflation concerns

CB cools off inflation concerns

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1CB cools off inflation concerns Empty CB cools off inflation concerns Thu Jul 12, 2012 1:27 am


Global Moderator
* Policy rates unchanged
* Credit growth easing, but spikes in May
* Reserves dip slightly
* End-June IMF targets met

The Monetary Board of the Central Bank has decided to keep policy interest rates steady, cooling off concerns on rising inflation expectations. The bank said yesterday (11) that credit growth and the trade deficit were showing signs of easing, but export earnings remains a concern while reserves fell slightly in May.

"Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index, increased to 9.3 per cent in June 2012 from 7.0 per cent in May 2012, while annual average inflation increased to 5.8 per cent in June from 5.6 per cent in the previous month. The increase in inflation in June 2012 was mainly due to the lower base in June 2011, the impact of the prevailing drought conditions on domestic fresh food prices and the recent revisions to administratively determined prices," the Central Bank said releasing its Monetary Policy Review for July 2012.

"At the same time, as a result of the several policy measures that are already in place to contain the emergence of demand side pressures arising from monetary expansion, broad money (M2b) growth decelerated to 20.9 per cent in May 2012 from 22.9 per cent in April 2012, while the growth of credit extended to the private sector by commercial banks also reduced from its peak of 35.2 per cent in March 2012 to 33.5 per cent in May 2012. Consequently, in the first 5 months of the year, credit extended to the private sector grew only by 10.5 per cent," the Central Bank said.

In absolute terms, private sector loans from the domestic banking sector increased in May to Rs. 31.7 billion, from Rs. 15 billion in April, while the government has also been a heavy borrower, with loans amounting to Rs. 15.6 billion in May, from 4.6 billion the previous month. However, government borrowings from the Central Bank fell by Rs. 22.2 billion in May.

However, comparing growth rates of outstanding debt, government borrowings from Central Bank rose 243.7 percent year-on-year in May, while borrowings from domestic banks rose 18.7 percent.

The International Monetary Fund (IMF) has forecast inflation to near 10 percent by the end of the year and has asked the Central Bank to maintain a tight monetary policy. Currency dealers over the past few months have been anticipating a rise in policy interest rates.

The IMF also said the government’s fiscal performance was under some strain as a result of the policy measures adopted to contain a balance of payment crisis; these policy measures came in for much praise by the IMF as previously reported in these pages.

The budget deficit reached 3.8 percent of GDP during the first four months of this year. The full year target is 6.2 percent.

"In the meantime, provisional data shows that the growth of import expenditure has been shrinking sharply in the first five months of the year, thereby narrowing the trade deficit, compared to the high levels recorded in 2011. With weaker global demand, most international commodity prices are also on a declining trend, which should, on a net basis, further ease pressure on the country’s imports this year, although the continuing sluggish global economic recovery may affect export earnings as well," the Central Bank said.

According to data released by the Central Bank, the trade deficit for the first four months of this year expanded 32.3 percent from a year earlier to US$ 3,319.9 million, slowing down from 44.8 percent recorded during the first quarter of the year. The trade deficit had expanded by nearly 100 percent in 2011. The import bill grew 11.9 percent for the period January to April 2012 to US$ 6,633.6 million from a year earlier, slowing down from a 17 percent growth rate during the first quarter (January to March 2012). However, export earnings fell 3.1 percent to US$ 3,313.8 million. The drop is sharper compared with the 1.4 percent decline during the first quarter.

"On the external front, by end-June 2012, Sri Lanka achieved all targets set under the Stand-By Arrangement (SBA) facility with the International Monetary Fund, thereby qualifying to receive the final tranche under the SBA facility. Such disbursement, along with other expected significant foreign inflows are likely to strengthen the external position of the country in the coming months, and enhance the gross official reserves, which stood at US dollars 5,815 million as at 31st May 2012, which is equivalent to 3.4 months of imports," the bank said.

The reserves have dropped slightly from US$ 5,835 million as at end April. The bank sold down reserves amounting to almost US$ 3 billion from the second half of 2011 to keep the rupee artificially strong against the dollar in the face of an expanding trade deficit and higher than anticipated credit growth. Reserves peaked at US$ 8 billion as at end June 2011and by the end of the year had fallen to US$ 5,958 million. By end-January 2012, reserves stood at US$ 5,806 million and US$ 5,522 million by the end of February. It picked up to US$ 5,730 by the end of March.

"Taking into consideration the above factors, and after reviewing the progress of the developments under the monetary policy measures that have already been taken, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 10th July 2012, decided to maintain the Repurchase rate and the Reverse Repurchase rate of the Central Bank unchanged at 7.75 per cent and 9.75 per cent, respectively," the Central Bank said. "The date for the release of the next regular statement on monetary policy will be announced in due course."

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