Monetary Policy Review – October 2016

Monetary Policy Review – October 2016
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November 1st, 2016


Growth in credit granted to the private sector by commercial banks decelerated to 27.3 per cent (year-on-year) in August 2016, from 28.5 per cent recorded in the previous month, amidst a continuous upward adjustment in market interest rates. The moderation of private sector credit coupled with net repayments to the banking system by the government and public corporations contributed to a deceleration of domestic credit granted by commercial banks in the month of August 2016. As a result, broad money (M2b) growth decelerated to 17.3 per cent, year-on-year, in August 2016, compared to a growth of 17.8 per cent recorded in the previous month.

As domestic supply conditions continued to normalise gradually, year-on-year headline inflation remained in mid-single digits in October 2016. Core inflation also remained subdued during the month. The increase in Value Added Tax (VAT) and the removal of certain exemptions applicable on VAT and the Nation Building Tax (NBT) with effect from 01 November 2016 are expected to have a one-off impact on inflation as observed in May/June 2016. However, in spite of these transitory developments, inflation is expected to remain in mid-single digit levels supported by prudent monetary policy measures and the realisation of the improvements in the fiscal sector.

On the external front, earnings from exports grew by 8.4 per cent in August 2016, year-onyear, reversing the continuous declining trend observed since March 2015. However, the deficit in the trade balance expanded by 8.0 per cent, year-on-year, in the month of August 2016 as the increase in expenditure on imports was larger than the increase recorded in exports. Earnings from tourism were estimated to have increased by around 14.6 per cent during the first three quarters of 2016 while workers’ remittances recorded a moderate growth of 3.9 per cent during the first three quarters of the year. The gross official reserve position was estimated at US dollars 6.5 billion at end September 2016, while the Sri Lankan rupee depreciated by 2.1 per cent against the US dollar thus far during 2016. Confidence gained from the continuation of the Extended Fund Facility (EFF) Program with the International Monetary Fund (IMF) is expected to catalyse medium to long term financial flows to the country, thereby strengthening the external sector of the economy, going forward.

Considering the above, the Monetary Board, at its meeting held on 31 October 2016, was of the view that the current monetary policy stance is appropriate, and decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively.