Sri Lanka's central bank maintained its monetary policy stance, as widely expected, and said there had been a net inflow to the country's bond and stock markets so far this year, confirming that "the effect of the US quantitative easing programme on the Sri Lanka economy is expected to be minimal."
The Central Bank of Sri Lanka maintained the 150 basis point spread in its new Standing Rate Corridor (SCR), with the Standing Deposit Facility Rate (SDFR) at 6.50 percent and the Standing Lending Facility Rate (SLFR) at 8.0 percent.
The central bank restructured its monetary policy framework last month, with SDFR setting a floor in its new corridor and SLFR the ceiling. At that point it narrowed the spread in its corridor to 150 basis points from 200 points due to reduced volatility in the call money market.
Net inflows to the Sri Lankan bond and stock markets have amounted to US$ 119 million up to Feb. 10 from the start of the year and the central bank said it had absorbed a net $58.7 million, helping the rupee remain stable. Gross official reserves were at comfortable levels, the central bank said, and the equivalent of 5.3 months of imports.
This year the rupee has remained stable against the U.S. dollar, trading at 130.8 dollar today, down by 2.4 percent since the end of 2012.
Sri Lanka's inflation rate is expected to remain around the current level throughout 2014, supported by well managed demand and conditions and improved domestic supply, the bank said.
In January headline inflation eased to 4.4 percent from 4.7 percent in December. The average rate in 2013 was 6.9 percent and the central bank targets inflation of 4-6 percent this year, declining to 3-5 percent in 2015 and 2016.
Market interest rates adjusted downwards following the central bank's compression of the rate corridor last month and higher levels of liquidity in the domestic money market due to proceeds from the country's sovereign bond in January.
Growth of credit to the private sector by commercial banks accelerated marginally to 7.5 percent in December from 7.3 percent and is expected to grow by some 16 percent this year.
Referring to the government's "mega infrastructure drive," that is increasing the economy's capacity, the central bank said its board was of the view that it would be "appropriate to further encourage the utilization of this investment potential, since such policies by the government would give rise to increased and accelerated sustainable economic growth in the period ahead."
Sri Lanka's Gross Domestic Product expanded by an annual 7.8 percent in the third quarter, up from a rate of 6.8 percent in the second quarter, the third quarter of accelerating growth. The central bank has estimated that the economy grew by 7.2 percent last year and should grow by 7.8 percent this year.
Last month Ajith Nivard Cabraal, governor of the central bank, said in an interview with Bloomberg that interest rates were at an appropriate level and the central bank would probably keep rates steady for the next three to six months under current conditions.
Sri Lanka raised US$ 1 billion in last month's sovereign bond issue to help finance its investment program, with the bond priced around 6 percent. U.S. investors purchased more than 60 percent of the bond, a central bank official said.