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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka cuts rates to boost credit

Sri Lanka cuts rates to boost credit

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1Sri Lanka cuts rates to boost credit Empty Sri Lanka cuts rates to boost credit Fri May 10, 2013 12:00 pm


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
May 10, 2013 (LBO) - Sri Lanka has cut its policy interest rate corridor by 50 basis points to 7.0 and 9.0 percent to boost credit, saying inflationary pressures were in check, amidst warnings by the International Monetary Fund to be careful.
"[T]here is now a need to stimulate the domestic economy, particularly in the light of the gradual moderation in headline inflation and subdued demand pressures in the economy," the Central Bank said in its May monetary policy review.

The IMF has warned against loosening policy, saying Sri Lanka has had a history of high inflation from loose policy.

But Central Bank said the economy has seem to have developed a greater capacity to have high growth without fuelling inflation and international commodity prices were also seen softening.

The central bank said after spiking sharply in April, its holdings of Treasuries which represents printed money on the asset side of its balance sheet has started to fall. In April the Central Bank is usually forced to print money to pay salary advances of state workers.

"Nevertheless, the situation has improved during the past few weeks with the Government being able to settle a part of its dues through the retirement of Treasury bills held by the Central Bank, with the outstanding Treasury bill stock declining to Rs. 119 billion by end April," the Central Bank said.

"In this regard, a pick-up in domestic economic activity in the balance part of the year is expected to generate higher tax revenues, thereby helping achieve the fiscal targets set out for the year.

"Moreover, the expected moderation in market interest rates would also ease the financing cost of the government debt, thus leaving greater resources to finance the public investment programme of the government.:

But a lowering of market rates which may boost private credit could also have an opposite effect. If credit markets are left to operate on their own such effects will be balanced through a market clearing interest rate.

But if at the time, the Central Bank injects money through reverse repo auctions, the reverse repo window, or outright purchases of Treasuries which is the most dangerous action, the exchange rate may weaken and inflation may also pick up, analysts say.

By May 05, excess liquidity in the banking system had disappeared and some banks had started to borrow from the reverse repo window at the then rate of 9.5 percent which was cut to 9.0 percent Friday.

The central bank was still withdrawing liquidity overnight through a repo auction at 8.3 percent, which had become the effective policy rate and which may fall now.

However under Sri Lanka's domestic due to existence of a wide corridor the effective rate can move closer towards the 9.0 percent ceiling rate if credit picks up.

The Central Bank said it is also extending the period banks can operate short reserves for two weeks instead of one.

It will allow banks operate for a longer period after giving credit without meeting their statutory reserve requirement of 8.0 percent with fresh deposits or borrowing from others or through or through the reverse repo window.

When liquidity is short such a move could also represent a loosening of policy, at least until the banking system re-adjusts, analysts say.

In 2011 and 2012 credit pressures built up and the Central Bank had to print money through outright purchase due to losses of energy utilities being financed with reverse repo window, reverse repo auctions and ultimately outright Treasuries purchases.

A 9.0 percent policy rate however is one of the highest in Asia.

For More Reading...

Thank You.


By Ranga Sirilal and Shihar Aneez

COLOMBO, May 10 (Reuters) - Sri Lanka's central bank unexpectedly cut its key monetary policy rates by 50 basis points on Friday, following some of its regional peers, to boost economic growth in the face of subdued demand.

It reduced its repurchase rate to 7.00 percent and reverse repurchase rate to 9.00 percent, to their lowest in more than one year after cutting them by 25 basis points in December from three-year highs.

Analysts had expected the central bank to keep policy on hold on Friday but predicted it could lower borrowing costs at its next meeting in June.

The rate cut comes despite comments from the International Monetary Fund (IMF) last week which said Sri Lanka must not ease monetary conditions as inflation remains a concern, even though the prices rose at a slower pace in April than in the previous month.

The central bank said in a statement there was now a need to stimulate the domestic economy after a slower-than-expected pick-up in economic activity in the first few months of 2013.

'Credit growth has been rather slow,' Governor Ajith Nivard Cabraal told Reuters. 'So there was a need to give impetus to stimulate growth and we decided to cut the rates. Inflation is also well under control.'

The island-nation's economic growth slowed to a three-year low of 6.4 percent last year, easing from a record high of 8.2 percent in 2011.

The central bank has estimated 7.5 percent growth this year, much higher than IMF's 6.25 percent forecast.

Annual inflation eased to 6.4 percent in April from a 7.5 percent a month earlier, but May inflation is expected to accelerate due to sharp increase in electricity tariffs, the state-run Department of Census and Statistics has said.

Danushka Samarasinghe, the head of research at Colombo-based TKS Securities said inflation risks may be to the upside if commercial banks pass on the full 50 basis point rate cut and it does stimulate demand.

The central bank held commercial banks' Statutory Reserve Ratio (SRR) steady at 8 percent, but increased their reserve maintenance period to two weeks from one week from June 1 to give them greater flexibility in managing liquidity.

'When the reserve maintenance period is short, commercial banks are sometimes compelled to borrow at higher rates to maintain the reserve,' a currency dealer said on condition of anonymity.

'But the central bank's decision will help to reduce volatility in market interest rates.

Central banks in Australia, South Korea, and India cut rates earlier this month., ID:nL3N0DK0XA]

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Kim Coghill) Keywords: SRILANKA ECONOMY/RATES

( Messaging: neez)

3Sri Lanka cuts rates to boost credit Empty Re: Sri Lanka cuts rates to boost credit Sat May 11, 2013 7:55 am


Vice President - Equity Analytics
Vice President - Equity Analytics
good move

4Sri Lanka cuts rates to boost credit Empty Re: Sri Lanka cuts rates to boost credit Sat May 11, 2013 12:29 pm


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
පොලී අනුපාත අඩුකිරීමට හැකියාවක් තිබෙන බව පසුගියදා මහ බැංකු අධිපතිවරයා අප සමග පැවසූ ආකාරයටම වාණිජ බැංකුවල පොලී අනුපාත තීරණය වීමට බලපාන මහ බැංකු පොලිය අඩුකිරීමට පියවර ගෙන තිබේ.

මේ අනුව, ශ්‍රී ලංකා මහ බැංකුව පවසන්නේ සිය ප්‍රතිපත්ති පොලී අනුපාතය පදනම් අංක 50 කින් අඩුකළ බවත් මේ නිසා මැයි මාසය සඳහා එම පොලී අනුපාත සියයට 7.00 සහ සියයට 9.00 දක්වා පහළ යන බවයි.

ජාත්‍යන්තර මූල්‍ය අරමුදල පසුගියදා අනතුරු හැඟවූයේ උද්ධමනය අඩු අගයක පවත්වාගෙන යාම සඳහා ලංකාව විසින් සිය පොලී අනුපාත අඩු නොකර තවදුරටත් පවත්වාගෙන යාම වැදගත් බවයි.

නමුත්, ඉන් පසුව මහ බැංකු අධිපති අජිත් නිවාඩ් කබ්රාල් මහතා අප සමග පැවසුවේ උද්ධමනය අඩුවීම හා ණය වර්ධනය අඩුවීම නිසා පොලී අනුපාත අඩුකිරීමට අවස්ථාවක් මහ බැංකුවට තිබෙන බවයි.

මහ බැංකුව විසින් පොලී අනුපාත අඩු කරනු ඇතැයි ඇතිවී තිබූ බලාපොරොත්තු හමුවේ පසුගිය දිනවල කොළඹ කොටස් වෙළඳ පොළ ඉහළ නගිනු දකින්නට ලැබුණි.

මේ වනවිට, ජාත්‍යන්තර වෙළඳ පොළේ භාණ්ඩ මිල ගණන් අඩුවෙමින් තිබීමත් පොලී අනුපාත අඩුකිරීමට හේතුවක් වූ බව මහ බැංකුව සඳහන් කර තිබේ.

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