Rate cut may have incentivized outflows: CB chief | Sunday Observer

Rate cut may have incentivized outflows: CB chief

* International dimension one key factor

* SDFR and SLFR to be maintained at current levels

* 2017s fiscal outcome needed to loosen policy

The Governor of the Central Bank of Sri Lanka, Dr. Indrajit Coomaraswamy says that a rate cut on February 15, the Central Bank’s first monetary policy review for 2018 could have partly incentivized outflows from Sri Lanka.

Explaining the rationale behind keeping rates steady amidst arguments that the monetary authority should have eased policy rates with a view to stimulate growth, the governor pointed out that the international dimension was one key factor.

The Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 7.25 per cent and 8.75 per cent, respectively.

“Given that we are seeing international interest rates going up, in such a context if we reduce our interest rates, then the differential between our rates and international rates gets even bigger.

“In a context where money is beginning to move from emerging markets generally to advanced markets because of interest rate developments in the advanced economies, reducing rates could have led to incentivizing outflows from the Sri Lankan economy,” the governor pointed out.

Addressing a recent press conference to announce the monetary policy decision at the Central Bank auditorium, Dr. Coomaraswamy noted that the advanced economies like the United States, Europe and Japan are experiencing ‘a period of synchronized growth’ for the first time in many years while growth in China and India has started to pick up.

“At a time when global growth is gaining momentum, we are seeing a normalization of interest rates particularly in the United States but there are also signs the European Central Bank will possibly end its asset purchase or quantitative easing programme in the last quarter of this year,” the governor observed.

On the other hand, Dr. Coomaraswamy noted that the increase in global oil prices could also put pressure on domestic price levels while fiscal developments was another factor to watch out for.

“Although in the first 11 months of last year, despite the unanticipated flood and drought relief, fiscal performance was broadly satisfactory.

But at the end of each year, there is sometimes expenditure that comes through and we still don’t have the numbers. So we would like to wait and see what the actual fiscal outcome is for 2017 is before we start loosening monetary policy,” the governor elaborated.

According to analysts, factors that supported an easing of policy rates was the persistence of the output gap as Sri Lanka has not reached its potential growth, the reduction of inflation in both December 2017 and January 2018, the decline in supplies of broad money and deceleration in the private sector credit growth. (AR)