Sri Lanka’s CB cuts key monetary policy rates
Saturday, 11 May 2013
Sri Lanka's central bank (CB) 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 per cent and reverse repurchase rate to 9.00 per cent, 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 per cent last year, easing from a record high of 8.2 per cent in 2011.
The central bank has estimated 7.5 per cent growth this year, much higher than IMF's 6.25 per cent forecast.
Annual inflation eased to 6.4 per cent in April from a 7.5 per cent 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. The central bank held commercial banks' Statutory Reserve Ratio (SRR) steady at 8 per cent, but increased their reserve maintenance period to two weeks from one week from June 1 to give them greater flexibility in managing liquidity.
| IMF concerned as Sri Lanka cuts interest rates |
10 May 2013
Sri Lanka’s Central Bank has decided to cut the reverse repurchase rate to 9 percent from 9.5 percent and the repurchase rate to 7 percent from 7.5 percent, a bigger reduction than expected by analysts.
"[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.
Economic growth slowed from 8.2% in 2011 to 6.4% in 2012, after a fall in demand for Sri Lankan exports, including tea and textiles, but the treasury has bizarrely forecast growth of 7.5% for this year.
Sri Lanka: why the unexpected cut? - Financial Times (10 May 2013)
The International Monetary Fund yesterday warned Sri Lanka against further easing of monetary policies.
“With inflation elevated and growth slowing, monetary policy is facing a challenging task,” the International Monetary Fund said in a statement.
“Further stimulus should be on hold until inflation pressures decline.”
The governor of the Central Bank Ajith Cabraal said there wouldn’t be any further cuts for a while, but also suggested that the cuts were due to internal issues rather than international conditions.
“We made a fairly steep cut this time because we think that would give a very strong signal,” Cabraal said to Bloomberg.
“That will also make the overall conditions rather stable, so that people will not be looking at new rate cuts in the near future.”
“We have seen a slight slowdown in our economy, which has been rather disconcerting, and we believe some impetus and some kind of support needs to be given to economy to kick start it once again,” he said.
Sanjeewa Fernando, head of research at brokerage C T Smith in Colombo, told the Financial Times that the move comes in anticipation of further bad news.
“I think they are not happy with the first quarter GDP numbers, which they already have access to as policymakers, even though they are not out for the rest of us yet,”
“There have been massive drops exports and imports recently, and so the next quarter could even be below 6 per cent,
“It seems once you’ve slammed on the brakes, it’s not so easy to get things going again.”
10 May 2013“Further stimulus should be on hold until inflation pressures decline.”
“That will also make the overall conditions rather stable, so that people will not be looking at new rate cuts in the near future.”
“We have seen a slight slowdown in our economy, which has been rather disconcerting, and we believe some impetus and some kind of support needs to be given to economy to kick start it once again,” he said.
“There have been massive drops exports and imports recently, and so the next quarter could even be below 6 per cent,
“It seems once you’ve slammed on the brakes, it’s not so easy to get things going again.”
