The Monetary Board will hold its key rates at current levels as maintaining price stability came in as the top item in the agenda ahead of providing a stimulus to revive the hobbling economy.
In its second meeting last week, the executive board decided to leave the Standing Deposit Facility Rate or the rate at which the excess liquidity is mopped up, at 8.00 percent and the Standing Lending Facility Rate or the rate at which the liquidity is injected into the banking system, at 9.00 percent, only a month after the same board decided to cut the banks’ reserve ratio by 100 basis points to release liquidity to the money market.
Analysts and economists were divided over the possible action ahead of last week’s decision by the Monetary Board as some believed the Central Bank might cut rates at least by half a percent to provide assistance to the sluggish economy, while another set of people believed the rates to be left unchanged until the imbalances generated during the 2015/16 period is gradually settled.
Economic growth in the fourth quarterof last year came was at an astoundingly low 1.8 percent with the full-year growth at an extremely modest 3.2 percent, compared to the revised 3.4 percent in 2017, well below the economy’s potential.
Meanwhile, the private sector credit sank by Rs.4.0 billion in January and February this year.
Last week, First Capital Research placed a 50 percent probability of at least a 25 basis point cut in the standing lending facility rate at last week’s policy meeting to fuel economic growth.
The expectations of a rate cut was further heightened when the lawmakers last week nudged the bankers to cut their lending rates and accelerates lending to the small and medium enterprises to revive the downward trend in the economy.
The meeting held at the Prime Minister’s office was also attended by Central Bank Governor Dr. Indrajit Coomaraswamy.
The biggest contributor to last week’s policy decision was inflation, which showed some signs of upward movement in recent months and the need for the Central Bank to maintain inflation at the board’s desired range between 4-6 percent this year and beyond under its inflation targeting monetary policy settings.
Nevertheless the Monetary Policy statement did not completely rule out the possibility of a rate cut at a future meeting.
“The board was also of the view that, if the current trends in global finance markets, trade balance and credit growth continue, policy interest rate could be reduced in the period ahead, given well anchored inflation and inflation expectations,” the statement added.
In recent months, however, Sri Lanka’s rates across the board have shown some gradual downward movement and this was very apparent in the government securities yields which act as benchmark rates for all other financial assets.