Sri Lanka's central bank held its benchmark repurchase rate steady at 7.50 percent, saying the current policy stance is appropriate as the past reduction in policy rates and the expiration of a credit ceiling in December 2012 is expected to help the economy move toward its full potential in 2013.
The Central Bank of Sri Lanka, which raised rates by a net 50 basis points in 2012 but cut in December, said broad money growth continued to moderate in December to 17.6 percent from a peak of 22.9 percent in April and growth in credit to the private sector also eased to 17.6 percent by the end of 2012 from 34.5 percent at the end of 2011.
"However, with increased borrowing by the Government and
public corporations from the banking sector, the overall expansion of domestic credit
remained at 21.7 per cent at end 2012," the central bank said in a statement.
Credit to the private sector by commercial banks is expected to increase by around 435 billion rupees, or an annual growth rate of 18.5 percent, in 2013 up from 2012's expansion of 352 billion, but the bank said "since such a credit growth will be compatible with the anticipated expansion in economic activity, it is not expected to fuel any
demand driven inflationary pressures during the year."
Short-term money market rates have declined sharply in response to the central bank's easing and it expects deposit and lending rate to adjust in coming weeks, helping stimulate economic activity.
Sri Lanka's inflation rate rose to 9.8 percent in January from December's 9.2 percent due to adverse weather and revisions to administered prices but vegetable prices have already declined substantially so the inflation rate in February should be around the current level and then decelerate.
Sri Lanka's Gross Domestic Product rose by an annual 4.8 percent in the third quarter, down from the second quarter's growth rate of 6.4 percent.
Tight monetary policy in early 2012 resulted in lower non-oil imports, narrowing the trade deficit and increased workers' remittances, service inflows and better inflow to the capital account resulted in a balance of payments surplus, expanding the country's external reserves and leading to a higher rupee, the central bank said.