CB raises policy rate to 8.50%

2016-07-29

Sri Lanka's Central Bank yesterday (28) raised policy rates by 50 basis points taking the rate corridor to 7% and 8.5%. The Central Bank (CBSL) Monetary Board also decided to raise the Standing Deposit Facility Rate (SDFR) to 7.00%.

"Further tightening of monetary policy is required to curb excessive demand in order to pre-empt the escalation of inflationary pressures and to support the balance of payments," a CBSL statement said. "The Board (Monetary Board)is of the view that tightening of monetary policy in a forward looking manner will ensure the maintenance of inflation at mid-single digits in the medium term, which is supportive of the growth momentum in the economy," it said.

"As such, the current policy adjustment is not expected to have a significant impact on the long end of the yield curve."
This policy rate hike came after the Central Bank held its key interest rates steady for five straight months.
The statement also said that market interest rates have adjusted upwards in response to the monetary tightening measures adopted in early 2016 and continued low levels of rupee liquidity in the domestic money market.

Although some deceleration in the growth of broad money (M2b) supply was observed in the month of May 2016, monetary expansion remained above the desired levels.

In spite of the increase in market interest rates, credit granted to the private sector by commercial banks increased at the high pace of 28.0 %, year-on-year, in May 2016, in comparison to 28.1 % in April 2016.

Provisional data also indicates that the high growth of credit to the private sector has continued during the month of June as well.

"The continued appetite for bank credit by the private sector in spite of the upward movement in market interest rates could create excessive demand and high inflation in the economy in future," it stated. (IG)