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CB raises rates by 25 basis points

Saturday, 25 March 2017


Follows US rate hike and stubbornly-high private
sector credit
Says precautionary measure to contain inflation
through credit expansion
Noted improvement in fiscal operations and meeting
2016 Budget deficit target
Expects inflation to moderate after adjustments to
new taxes
Private sector credit decelerated to 20.9% in January
from 21.9% at end 2016

Bowing to expectations, the Central Bank yesterday


raised policy rates in step with the US rate hike and to buttress
the economy against inflation and stubbornly-high private sector
credit, following lower than expected growth numbers for 2016.

The Central Bank, releasing its monetary policy stance, said the
move was a precautionary measure to contain the build-up of
adverse inflation expectations and the possible acceleration of
demand side inflationary pressures through excessive monetary
and credit expansion.
The Monetary Board also took into account the notable
improvements in fiscal operations, which have resulted in the
overall budget deficit in 2016 declining to envisaged levels. The
Board was of the view that these improvements, together with the
substantial upward movements already observed in market
interest rates, have reduced the required adjustment in policy
interest rates, it said in the statement.

Accordingly, the Monetary Board decided to increase the key


policy interest rates of the Central Bank, namely the Standing
Deposit Facility Rate (SDFR) and the Standing Lending Facility
Rate (SLFR) by 25 basis points each, to 7.25% and 8.75%,
respectively.

As per the provisional estimates of the Department of Census and


Statistics (DCS), the Sri Lankan economy grew by 4.4% in real
terms during 2016 compared to the growth of 4.8% in 2015.
Within this annual growth, Industry-related activities grew notably
by 6.7% driven by construction related activities, while Services-
related activities grew by 4.2% mainly with the expansion of
financial services, insurance and telecommunications.

However, Agriculture-related activities contracted by 4.2% in


2016, impacted by supply side disruptions on account of floods in
the second quarter and drought conditions during the final
quarter of 2016.
In spite of challenging external factors such as adverse weather
conditions and global developments, an acceleration of growth
was observed towards end 2016 with the last quarter of 2016
recording a growth of 5.3%, partly supported by the base effect.

In the meantime, headline inflation, as measured by the year-on-


year change in the Colombo Consumers Price Index (CCPI,
2013=100), accelerated to 6.8% in February 2017 from 5.5% in
January 2017. A similar trend was observed in the National
Consumer Price Index (NCPI, 2013=100) based headline inflation,
which rose to 8.2% (year-on-year) in February 2017 from 6.5% in
January 2017. Year-on-year core inflation based on both CCPI and
NCPI also remained high at 7.1%in February 2017.

The recent acceleration in inflation is largely due to the impact of


prevailing drought conditions and adjustments to the tax
structure, and it is projected that inflation would revert to the
desired mid-single-digit levels in the period ahead and stabilise
thereafter, unless disrupted by adverse inflation expectations,
the statement added.

The earlier tightening of monetary policy and monetary conditions


by the Central Bank and the resultant increase in market interest
rates are likely to have impacted the growth of credit to the
private sector by commercial banks to some extent. Accordingly,
the year-on-year growth of private sector credit decelerated
further to 20.9% in January 2017 from 21.9% at end 2016.

Meanwhile, credit to the public sector increased noticeably,


causing year-on-year broad money (M2b) growth to remain high
at 17.7% in January 2017, although this was a deceleration
compared to 18.4% in December 2016. Nevertheless, the
deceleration in monetary and credit aggregates has been slower
than expected.

On the external front, the deficit in the trade account of the


balance of payments (BOP) was recorded at $9.1 billion in 2016
compared to $8.4 billion in 2015, with expenditure on imports
increasing by 2.5% and earnings from exports contracting by
2.2% during the year. Provisional data for January 2017 also
indicated a widening of the trade deficit. Earnings from tourism
and workers remittances continued to cushion the adverse
impact of the trade deficit on the BOP.

In the meantime, outflows of foreign investments from the


Government securities market observed in early 2017 appear to
have subsided, and marginal inflows have been experienced in
spite of the increase in policy interest rates in the United States.
Gross official reserves were estimated at $5.6 billion at end
February 2017 compared to $6 billion at end 2016, while the Sri
Lankan Rupee depreciated by 1.2% against the US Dollar during
the year up to 22 March.
Shares edge up from 1-yr low on foreign buying
Reuters - Shares edged up on Friday from a more than one-year
closing low as foreign investors picked up battered shares in a
market that had already factored in a monetary policy tightening
by the Central Bank, dealers said.

The Central Bank raised its benchmark interest rates by 25 basis


points on Friday for the first time in eight months to contain high
inflationary expectations and a possible acceleration of demand
side inflationary pressures.

The Colombo Stock Index closed 0.3 percent up at 5,996.28,


edging up from its lowest close since March 15, 2016 hit on
Thursday. The index breached a key psychological barrier of 6,000
on Wednesday.

Foreigners are buying in the oversold market and are looking at


the long term, SC Securities Head of Research Yohan
Samarakkody said.
Rate hike was already factored in, Samarakkody said, adding
that some investors were expecting a larger hike.

Turnover stood at Rs. 1.92 billion ($12.7 million), more than


double this years daily average of Rs. 671 million.

The index had lost 2.1 percent through Thursday since 7 March,
when the IMF called for monetary policy tightening if credit
growth or inflation do not abate.

The bourse rose to neutral territory from oversold, with the


14-day relative strength index at 30.480 points versus Thursdays
24.614, Thomson Reuters data showed. A level between 30 and
70 indicates the market is neutral.

Foreign investors net-bought shares worth Rs. 551.1 million,


raising the year-to-date net foreign inflow to Rs. 3.81 billion in
equities.

Shares in Ceylon Tobacco Company PLC rose 3.9 percent, while


Commercial leasing and Fiance PLC jumped 8 percent.
Rupee falls on raised key rates
Reuters - The rupee closed lower on Friday on importer dollar
demand, even as the countrys Central Bank raised benchmark
interest rates by 25 basis points in a move also aimed at easing
pressure on the currency.

The Central Bank raised interest rates for the first time in eight
months, saying tighter policy was a precaution against a build-up
of inflationary pressures.

The rate hike could help stabilise the rupee as rising imports and
outflows due to rupee bond sales by foreign investors have
exerted pressure on the currency, analysts said.

Rupee forwards were active, with two-week forwards closing at


152.60/70 per dollar, compared with Thursdays close of
152.45/55.

There was importer dollar demand. We have seen a state bank


buying dollars, maybe to cover a large oil bill, said a currency
dealer, asking not to be named.

The Central Bank raised the spot rupee reference rate by 25 cents
to 151.60 on Monday.

Foreign investors net-sold government securities worth Rs. 1.41


billion rupees ($9.3 million) in the week ended March 15, after two
weeks of net inflows.

They have net-sold Rs. 63.3 billion of such instruments so far this
year.
Posted by Thavam

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