Sri Lanka's central bank held its benchmark repurchase rate steady at 6.50 percent, as expected, saying the outlook for inflation remains benign, exports are continuing to improve and there are signs of a take-off in credit to the private sector.
The Central Bank of Sri Lanka cut its rate by 50 basis points last month for total cuts of 100 basis points this year and said the easing of policy continued to yield the desired positive effects.
"Going forward, the inflation outlook continues to remain benign, with subdued international commodity prices, reduced supply side pressures, and well contained demand driven inflationary pressures," the central bank said, adding:
"In this background, according to current projections, inflation is expected to remain at mid-single digit levels throughout 2014 as well."
Sri Lanka's annual inflation rate rose to 6.7 percent in October from 6.2 percent but the annual average eased to 7.6 percent from 7.8 percent. Core inflation continued its declining trend, falling to an annual rate of 2.6 percent from 3.0 percent.
The central bank aims for inflation to fall to 5.0-5.5 percent by the end of the year for an average rate of 7.0 percent.
On Nov. 1 the central bank governor of Sri Lanka said inflation should slow to between 4 percent and 6 percent next year unless there is a major supply shock.
Sri Lanka's broad money growth increased to 16.3 percent on an annual basis in September from 15.3 percent due to a significant increase in net foreign assets, the bank said, and credit disbursed to the private sector by domestic banking units of commercial banks rose by around 20 billion rupees during September "indicating some early signs of a take-off in credit," the bank said.
Exports are continuing to improve, the bank said, heightening expectations of sustained growth in export proceeds during the rest of the year, while imports are expected to decline marginally this year, leading to a narrower trade deficit.
"Meanwhile, the recent positive developments in advanced economies raising the prospect of a global economic turnaround, may also result in increase inflows to the financial sector account, thereby strengthening the BOP and increasing the reserve position further, in the near term," the bank said in a much more upbeat assessment than in October when it voiced concern of market volatility due to the U.S. Federal Reserve's delay in tapering it asset purchases and the shutdown of the U.S. government.
Sri Lanka's gross official reserves rose to USD 7.1 billion at the end of October from 7.0 billion in August, equivalent of 4.5 months of imports, while the current account deficit narrowed to 95.1 billion rupees and the central bank expects the deficit to shrink further due to inflows from the export of goods and services and workers' remittances.
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