Monetary policy on even keel

CB insists price cuts and possible Budget handouts will not impact monetary policy
■ Insists easing of policy beneficial to credit growth, wants medium term rate at 6%
■ Inflation to remain low, industry andservices credit growth at 12%-13%
By Uditha Jayasinghe
Just days ahead of Budget 2015 the Central Bank yesterday downplayed its effect on monetary policy, insisting possible relief to the public would not impact its long-term targets of low inflation and sustainable growth.

Explaining the rationale behind the country’s current monetary policy stance, Central Bank Deputy Governor Dr. Nandalal Weerasinghe told a gathering at the Ceylon Chamber of Commerce a reduction in fuel and electricity prices along with other possible reductions in the Budget to be presented on Friday is unlikely to reflect on the monetary policy.
He pointed out the monetary policy dealt largely with the demand side of the economy while Budget relief would affect the supply side. While possible increase in allowances could lead to a marginal increase in inflation, Dr. Weerasinghe noted the Central Bank has targeted 5% inflation, which gives sufficient breathing space for the monetary authority.
“At present inflation is maintained at 3%-4%. The monetary policy is based on output and inflation. At present we see no overheating of the economy and therefore expect inflation to remain at current levels. In fact low inflation rates indicate we have space to relax monetary policy even further. One-off price changes in fuel or other commodities will have no impact,” he said.
Dr. Weerasinghe also defended the continued easing of the monetary policy since late 2012, pointing out credit growth to the private sector is increasing after initial resistance.
He credited the Central Bank of using “unconventional instruments,” referring to the limitations placed in September on the Standing Deposit Facility, which he argued was encouraging the private sector to invest.
Buoyed by low inflation and steady growth, the Central Bank is focused on reducing interest rates in the medium term to about 6% and called on banks to adjust rationally for longer term credit. He emphasised it would be “unimaginable” for Sri Lanka to have zero interest rates.
As such, market expectation that Sri Lanka will move toward a zero interest rate regime like the regime found in Japan, EU, the UK and USA were dismissed by him as a step largely suitable for developed economies and not for local requirements.
The Deputy Governor acknowledged 7.7% growth in the first half of 2014 was driven by Government and private sector external borrowing, increased exports, remittances and Central Bank purchase of excess dollars.
“However, we understood that this cannot happen consistently and credit must be stimulated. Expanding credit is necessary to support domestic borrowing. These were aggressive steps taken by the Central Bank.”
Dr. Weerasinghe went on to say that business sentiment was positive as credit growth of the industry and services sector had grown by 12%-13%, which would not have been possible if the private sector was not upbeat. He attributed the slight drop in agriculture spending to the drought and highlighted the issue of gold-backed loans after prices dropped in the international market.

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