Sri Lanka's central bank raised its key interest rates by 50 basis points, saying the "excessive growth in broad money fueled by domestic credit expansion in the midst of continued upwards trend in underlying inflation requires pre-emptive policy measures in order to contain further build-up of demand driven inflationary pressure."
The Central Bank of Sri Lanka, which cut its policy rate by 50 basis points in 2015, raised the standing deposit facility rate (SDFR) to 6.50 percent from 6.0 percent and the Standing Lending Facility Rate (SLFR) to 8.0 percent from 7.50 percent.
Although the central bank's January increase of its reserve requirement had absorbed excess rupee liquidity from the money market and market rates had moved higher, the central bank said "certain risks to macroeconomic stability continue," such as the growth in money supply.
Money supply as measured by M2 rose by an annual rate of 17.8 percent in December, 2015 compared with 13.4 percent in December 2014 as the growth in credit granted to the private sector by banks accelerated to 25.1 percent in December last year form 8.8 percent in December 2014.
Sri Lanka's headline inflation rate eased to 0.9 percent in January from 2.8 percent in December, reflecting the low international commodity prices, favorable supply of domestic factors and the comparison with a relatively high base in January 2015, the central bank said.
Core inflation rose to 4.6 percent in January from 4.5 percent in December 2015 and 0.8 percent February 2015.
The Central Bank of Sri Lanka issued the following statement:
Monetary Policy Review – February 2016
Broad money (M2b) continued to grow at a high pace, recording a growth of 17.8 per cent
(year-on-year) in December 2015 compared to 13.4 per cent in December 2014. The year-on-year
growth of credit granted to the private sector by commercial banks accelerated during the year, with
a growth of 25.1 per cent in December 2015 in comparison to 8.8 per cent in December 2014. In
absolute terms, the expansion in private sector credit during 2015 amounted to Rs. 691.4 billion
compared to Rs. 223.9 billion in 2014.
The Colombo Consumers’ Price Index (CCPI, 2006/2007=100) based core inflation
continued its increasing trend reaching 4.6 per cent in January 2016, on a year-on-year basis, from
0.8 per cent recorded in February 2015. Headline inflation, as measured by the year-on-year change
in CCPI decelerated to 0.9 per cent in January 2016, mainly reflecting the impact of low
international commodity prices, broadly favourable domestic supply conditions as well as the
relatively high base in January 2015. Year-on-year headline inflation based on the National
Consumer Price Index (NCPI, 2013=100) was at 4.2 per cent in December 2015.
The Central Bank’s decision to increase the Statutory Reserve Ratio (SRR) with effect from
16 January 2016 has permanently absorbed a part of excess rupee liquidity from the domestic
money market. The decline in excess liquidity also resulted in market interest rates adjusting
upwards. In effect, most market rates have shown adjustments towards the levels observed prior to
the reduction in policy interest rates in April 2015.
Considering these developments, the Monetary Board, at its meeting held on 19 February
2016, observed that, in spite of the recent policy measures taken by the Central Bank and some
upward adjustments observed in market interest rates, certain risks to macroeconomic stability
continue. In particular, the Monetary Board was of the view that the excessive growth of broad
money fuelled by domestic credit expansion in the midst of continued upward trend in underlying
inflation requires pre-emptive policy measures in order to contain further build-up of demand
driven inflationary pressures.
Accordingly, the Monetary Board decided to increase the Standing
Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank
by 50 basis points each, to 6.50 per cent and 8.00 per cent, respectively, effective from the close of
business on 19 February 2016.
Monetary Policy Decision:
Policy rates increased
Standing Deposit Facility Rate (SDFR) 6.50%
Standing Lending Facility Rate (SLFR) 8.00%
Statutory Reserve Ratio (SRR) 7.50% "