Monetary Policy Review, October 2013

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
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E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release

Monetary Policy Review – October 2013
Prudent demand management policies and supply side improvements have resulted in inflation remaining at single digit levels for the past 56 months, signaling the success of policies already implemented. Headline inflation decreased marginally to 6.2 per cent (y-o-y), while core inflation declined to its lowest at 3.0 per cent (y-o-y), in September 2013. Going forward, the inflation outlook continues to remain favourable with restrained international commodity prices, reduced domestic supply side pressures, and well contained demand driven inflationary pressures.

Broad money growth for August 2013 was in line with projections for the year, indicating that the current monetary conditions could support higher growth in the second half of 2013. A sharp moderation in credit obtained by public corporations from the banking sector during August 2013, due to improved cash flow positions, was also expected to continue and thereby further alleviate demand side pressures and release resources for private sector investments. Further, policy easing since December 2012 had resulted in a reasonable downward adjustment in short term interest rates, including call money market rates and prime lending rates, with space remaining for further adjustments in longer term lending rates.

During the year, the conduct of monetary policy has been aimed at providing the necessary impetus to allow for economic growth to accelerate, in the absence of demand pressures. In that context, the policy easing in December 2012 and May 2013 reduced the borrowing costs of economic agents gradually, thereby encouraging private sector investments. These policies have strengthened the macroeconomic environment which is likely to enable the economy to comfortably exceed a GDP growth rate of 7 per cent in 2013.

In the meantime, the recent growth forecasts for advanced economies and emerging market economies have raised concerns regarding the global economic recovery. The heightened uncertainty arising from the delay in announcing tapering of the quantitative easing (QE) by the US Federal Reserve, coupled with the current political impasse experienced by the United States, resulting in a government shutdown and inability to increase the debt ceiling has also increased market volatility. Nevertheless, with the inflow of NSB bond proceeds, and the decline of the trade account deficit by 24.2 per cent in August 2013 due to higher earnings from exports and a reduction in the expenditure on imports, gross official reserves reached US dollars 7.0 billion, equivalent to 4.5 months of imports, further easing pressure on the current account and the balance of payments.

In this background, the Central Bank was of the view that, in keeping with the benign inflation and favourable inflation outlook environment, there is still further space to ease monetary policy in order to harness Sri Lanka’s full economic potential, and stimulate the economy to reach a higher growth trajectory in 2014. Accordingly, the Monetary Board at its meeting held on 14th October 2013, decided to reduce the Repurchase rate and the Reverse Repurchase rate of the Central Bank by 50 basis points, respectively, thereby placing the Repurchase Rate at 6.50 per cent and the Reverse Repurchase Rate at 8.50 per cent with immediate effect.

The date for the release of the next regular statement on monetary policy would be announced in due course.

http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20131015e.pdf

here we go.50bp

CBSL has just announced that they cut policy rate corridor by 50 basis points lowering its repo rate to 6.50 percent and reverse repo rate to 8.50 percent to boost credit.

Is this the turning point for the market? Will it touch 6400 by the end of November? My guess is yes.

Seems a good move by CBSL.
Lets see what will happen since here.
All the best guys...

VISA wrote:http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20131015e.pdf

Now that the Central Bank of Sri Lanka has brought an aggressive interest rate cut of 50 basis points, it is wise, as a stock investor, to be aware of the potential effects behind such a decision. Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. Here's why:

A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market. At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.

Overall, the unifying effect of an interest rate cut is the psychological effect it has on investors and consumers; they see it as a benefit to personal and corporate borrowing, which in turn leads to greater profits and an expanding economy.

(Source: Investopedia)

“The global scenario would partly have played a role in the bigger-than-expected cut,” said Sanjeewa Fernando, an economist at CT Smith Stockbrokers Pvt. in Colombo. “With global demand expected to be subdued, the rate cut will be a stimulus to exporters through lower borrowing costs and a more favorable exchange rate.”

http://www.businessweek.com/news/2013-10-15/sri-lanka-unexpectedly-cuts-rates-as-u-dot-s-dot-default-deadline-nears

COLOMBO, Oct 15 (Reuters) - Sri Lanka's central bank cut key policy interest rates by 50 basis points to multi-year year lows in a surprise move on Tuesday to spur economic growth, just three weeks after the International Monetary Fund advised it to hold rates steady.

'We thought it is a right time to give a push to the economy,' Central Bank of Sri Lanka Governor Ajith Nivard Cabraal told Reuters after announcing the rate cut.

'We would be able to achieve a 7 (percent) plus growth in the next year, even closer to 8 percent,' he said.

Sri Lanka is investing heavily in infrastructure, with major new port and airport projects underway along with urban and rural road building.

Growth this year was forecast at 7.5 percent, after slumping to a three-year low of 6.4 percent in 2012.

The decision to cut interest rates defied expectations. A Reuters poll of 11 analysts had expected the central bank's monetary board to keep the monetary policy rates unchanged.

The IMF had recommended on Sept. 25 that the central bank should keep policy rates steady to assess the impact of the U.S. Federal Reserve's possible tapering of stimulus programme in coming months.

Cabraal downplayed the risk posed to Sri Lanka by the Fed's expected tapering, though foreign selling of government debt had helped push the rupee to a record low of 135.20 per dollar on Aug. 28.

'I don't think Fed tapering will have an impact on us as we have already factored in. Cabraal said. 'In the event of tapering, I don't think we will have outflows, because those investors did not come due to QE (quantitative easing).'

Having steadied off its low, the rupee is now just 2.5 percent down since the start of the year.

The exchange rate, which is closely shepherded by the central bank, opened steady at 130.85 per dollar, while the share market opened 0.01 percent down, as markets showed scant reaction to the reate cuts.

With the latest easing, the central bank has cut policy rates by 125 basis point since December, and eased other policy tools.

The repurchase rate was slashed to 6.50 percent, a level unseen since the central bank began compiling data for the interest rate in December 1999. The reverse repurchase was cut to 8.50 percent, its lowest since February 2012.

The central bank said in a statement that given the benign outlook for inflation -- it eased to 6.2 percent year-on-year in September -- there was further space to ease monetary policy.

Cabraal said the outlook was positive so long as there were no sudden spikes in global oil or commodity prices in the next 12 months.

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Simon Cameron-Moore)

(shihar.aneez@thomsonreuters.com)(+94-11-232-5540)

(Reuters Messaging: shihar.aneez.thomsonreuters.com@reuters.net)(twitter.com/shihara neez)
http://www.xe.com/news/2013/10/15/3604141.htm

Policy  rates  have  been decreasing  steadily  since the beginning  of the  year as  a result  interest  rates  payable to depositors  by  Financial  Institutions  have  also been decreasing  the  hardest  hit are senior  citizens  depending  on  interest  income.
As  at  present  senior  citizens are paid an additional 1%  this is  hardly  sufficient  to  compensate  them for  the spiralling  cost of  living let us hope  that the  Central  Bank  would  look into this issue.

Low interest rate will push price of commodities down. Further low cost of capital effect for increasing of products and services. Ultimately will increase the living stranded of everybody.

bullrun wrote:Low interest rate will push price of commodities down. Further low cost of capital effect for increasing of products and services. Ultimately will increase the living stranded of everybody.  

Lower interest rates in the economy will:
Reduce the incentive to save. Lower interest rates give a smaller return from saving. This lower incentive to save will encourage consumers to spend rather than hold onto money.
Cheaper Borrowing costs. Lower interest rates make the cost of borrowing cheaper. It will encourage consumers and firms to take out loans to finance greater spending and investment.
Lower mortgage interest payments. A fall in interest rates will reduce the monthly cost of mortgage repayments. This will leave householders with more disposable income and should cause a rise in consumer spending.
Rising Asset Prices. Lower interest rates make it more attractive to buy assets such as housing. This will cause a rise in house prices and therefore rise in wealth. Increased wealth will also encourage consumer spending as confidence will be higher.
Depreciation in the Exchange Rate. A lower interest rate, makes it relatively less attractive to save money in that country. Therefore there will be less demand for the currency causing a fall in its value. A fall in the exchange rate makes exports more competitive and imports more expensive.

(Source: www.economicshelp.org)

CBSL as a priority should look into reducing govt borrowing and reduce losses in CPC, CEB, SL Airlines, Mihin.

Cheers!

Good move from a heavy criticized CB boss.. .

Why above mentioned  favorable  economic conditions do not reflect  sufficiently so far in  SL Stock market

D.G.Dayaratne wrote:Why above mentioned  favorable  economic conditions do not reflect  sufficiently so far in  SL Stock market

Coz... Beriwelawath mekkek hitiyoth .. makka kalupata nisa

Makkata kakul 4k thiyanawa..........Etc etc etc..................
Great bullrun................u have taken the point correctly and hope others will do ..............

Arena wrote:Makkata kakul 4k thiyanawa..........Etc etc etc..................
Great bullrun................u have taken the point correctly and hope others will do ..............

  


Mama wayasa gane hithala kata piyagena hitiya..

D.G.Dayaratne wrote:Why above mentioned  favorable  economic conditions do not reflect  sufficiently so far in  SL Stock market

I agree with you.. but it is part and parcel of CSE. If you are in CSE you have to play accordingly. When you have better understanding you can out perform others..

Arena wrote:Makkata kakul 4k thiyanawa..........Etc etc etc..................
Great bullrun................u have taken the point correctly and hope others will do ..............

He does not want to give some input or give some courage to members. My personal feeling is that the market will perform very positively in coming years. Only need is to hold the ground by selecting good stuff.

This man always go after MR. The history will give an appropriate place to him and hence, let the history to do that. We have come here to find some sort of easy money rather than working heard in a factory or in a field. We are not working people. We can blame to all but will never be able to work without mistakes. This gentleman may have worked in Gov just like a pet dog without even bark. Now after retirement he has stated to blame MR and all.

It is OK if it is his wish but he should go to Lipton circus without discourage our members at this good time.

I do not answer people who can,understand things

I ask them to follow a course on effective Reading and hearing

People who do not know read effectively understand only what they think They cant understand what the writer says

I sympathies  uneducated follows who can't  understand what i say and make
baseless allegations

I never blame MR
I always blame jokers who mislead him

Antonym wrote:Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. Here's why:

A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market. At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.


(Source: Investopedia)[/i]

OK.. investopedia explains it in a good way.. But can we really say the relationship with int rates and stock market performance is not related? Looking at how CSE operates?

We've seen at the pinnacle of int rates for FDs in 2011, stock market also made the peak and crashed. Those days, banks gave 20-25% FD rates for 2-5 years deposits. So cant blame ppl ig they wanted to move out from the market thinking that its too high...
It has come to this point at least now with 10-14% rates.. When FD rates are high, ppl diversify their portfolios to FDs cuz its a sure shot than market up-downs. But when the rates are low, they tend to take a small risk and trade/invest.

Then comes Antonym's enlightenment what a lower int. rates would do.. Yes, on the other hand, it invites ppl to spend more since what they gain from savings is peanuts.. But how other countries have survived? Imo, their rates are much lower 2-5%, even their lending rates are the same.

D.G,
We understand ur point too.. Its frustrating to see jokers around MR. But we cant change the system that's been there so easily.
What government institutions do every-time cannot be MR's decisions and I dont think even MR has a clue on what to do to make the economy grow.. Only the ppl who have some knowledge in this area would ask him to implement this and that.
But doing so, he also cannot make all ends equal squares, can he?

So, we, as educated, should look at these things in an non-political angle and see what positives to be expected than negatives..

Therefore, rather than blaming jokers who mislead MR, u can also add few points here rite? Ur matured, well educated, experienced in life. So you have a great and worthy cause to undertake here - enlighten the youngsters, share your experiences to educate them to be of worthy citizens in SL. in a non-political manner.. No MR, govt is needed for such rite?

Dear Smallville


I don't know how old are you but you seems like so matured as well as well educated.  I am proud of people like you.

Want to be shocked?? Here is a kicker.

General Saving account rate in USA for a whole year : hold on now , 0.01% ( yes 0.01% per annum)

FD rates ?? If you lucky you can get 0.2% per annum at regular stable bank

smallville wrote:

But how other countries have survived? Imo, their rates are much lower 2-5%, even their lending rates are the same.

Thank you  Smallville

I also try see stock market problems independently.That  is why i 
write against the govt interference to stock market



Politically i have been a supporter MR from 1970. I worked in Presidents office during the presidential election time.People who know me know about my political connections from university days in late 1960s

Most of young people do not know How read efectively
They understand what they assume