‘Private sector credit responsive to interest rates’

By Sanath Nanayakkare

‘Lags in monetary transmission could give the impression that monetary policy is not working, but the evidence provided supports the argument that when all policy instruments are considered, private sector credit is responsive to interest rates with a time lag, said Dr. P. Nandalal Weerasinghe, Deputy Governor, Central Bank of Sri Lanka at the Ceylon Chamber of Commerce Monday.

Weerasinghe said so while making a detailed presentation on the theme,’Sri Lanka’s Monetary Policy Programme’. The event was organized by the Ceylon Chamber of Commerce.

"Credit flow to the private sector has been slow to pick up despite relatively eased monetary conditions. The significant reduction in gold backed loans subsequent to the fall in international gold prices and the availability of alternative financing methods mainly contributed to the deceleration in the growth of credit to the private sector," he said.

"Under monetary targeting, CBSL has reduced and maintained inflation at single digit levels for the past 5+ years. The CBSL is already in a de facto flexible inflation targeting regime. Going forward, a stronger monetary policy framework such as flexible inflation targeting will help consolidate our achievements so far."

"Further, the credit guarantee scheme for pawning advances along with the reduction in the maximum rate on pawning will allow normalize pawning activities."

"The CBSL has indicated its desirable inflation path as 3-5% for the medium term, which is consistent with emerging market inflation targets. Deviations below or above that tolerance band poses macroeconomic risks, and therefore the CBSL will continue to monitor inflation developments closely."

"Also, a balance is made between the need for encouraging investors through low lending rates and the impact on vulnerable segments due to low deposit rates."

"The monetary programme is prepared by the Central Bank taking into account economic factors such as the expected fiscal and balance of payments developments, desired levels of economic growth and inflation."

"Aided by eased access to various sources of financing, GDP grew at a commendable pace. The economy rebounded strongly from 2012 to record a GDP growth of 7.7% in the first half of 2014. Growth remains largely on track with the economy’s rising potential."

"Another main objective of the Central Bank is the price stability and financial system stability. A situation has been maintained where there are no wide fluctuations in the general price level in an economy which helps to achieve sustainable economic growth."

"Since early 1980s, monetary management in Sri Lanka is based on a monetary targeting framework."

"In 2001, the floating exchange rate regime was introduced to ensure facilitation of effective monetary policy conduct."

"In 2002, the independence of the CBSL was strengthened by having majority of the Monetary Board members

(3 out of 5) from the private sector."

"Given the sustained low inflation environment, the CBSL continues maintain a relaxed monetary policy stance since end 2012."

"The Central Bank monitors and controls monetary aggregates, interest rates, and the exchange rate to achieve price stability."

"Price stability is to be achieved by influencing changes in broad money supply, which is linked to reserve money through a multiplier."

"A change is necessary in the country’s monetary policy framework for technical and economic reasons as well as financial market developments. The Central Bank has already announced plans to move towards an inflation targeting regime."

"To achieve this end, the budget deficit has been reduced to a reasonable and predictable level to reduce the inflationary impact of budgetary financing and a more representative price index to better reflect consumer behaviour, Weerasinghe said

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