Sri Lanka's central bank left its key interest rates steady, saying its current accommodate monetary policy stance was appropriate and there is "ample space for market lending rates to reduce without a further adjustment in policy rates at this juncture."
The Central Bank of Sri Lanka (CBSL) has already lowered its rates three times since May 2019 by a total of 150 basis points, most recently on Jan. 29 this year when it became the first central bank to cut rates after the outbreak of the coronavirus in China began to affect financial markets.
The rate cuts and other regulator measures taken by CBSL over the past months has led to a decline in market lending rates but the central bank said a faster downward adjustment was required to pass on the full benefits of recent policy measures to borrowers and the economy.
"Such downward adjustment in the market lending rates would also help weather any short term impact on financial markets and the real economy arising from the COVID-19 outbreak," CBSL said, adding it would continue to monitor developments, including the spread of the virus and its effects on Sri Lanka "while standing ready to provide liquidity to domestic financial markets as necessary."
CBSL left its Standing Deposit Facility Rate (SDFR) and its Standing Lending Facility Rate (SLFR) at 6.50 percent and 7.50 percent, respectively.
The coronavirus is likely to affect Sri Lanka's economy but the extent of this would depend on the global spread of the virus, its persistence and the policy responses of major economies and partners.
"Sri Lanka's economic links with China could be directly affected as significant volumes of consumer goods, intermediate goods and investment goods are imported from China," with a likely slowdown of the global economy and disruptions to the supply chain affecting Sri Lanka's exports and related logistics.
A decline in tourism would also affect Sri Lanka's tourism sector while the spread of the virus to countries with a significant number of Sri Lankan migrant workers could affect remittances.
"These adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates," it added.
The hit to Sri Lanka's economy comes just as the country is slowly recovering from the 2019 Easter Sunday bombings, which killed more than 250 people, dealing a heavy blow to its tourism sector.
Gross domestic product rose 2.7 percent year-on-year in the third quarter of 2019, up from 1.5 percent in the second quarter, and last month the International Monetary Fund (IMF) forecast Sri Lanka's economy would grow 3.7 percent this year, up from an estimated 2.6 percent in 2019, helped by a solid performance of the manufacturing sector and a rebound in the tourism sector.
However, the IMF on Feb. 7 said this forecast assumed the coronavirus would only have a limited negative effect on tourism.
The Purchasing Managers' Index for January slowed to 54,0 from 54,.3 in December with suppliers' delivery times lengthening significantly, especially in the textile and apparel sector, due to the coronavirus outbreak.
Many other respondents to the survey from the textile sector also highlighted that imports from China had been delayed indefinitely.
Sri Lanka's headline inflation rate has risen in the last four month to 6.2 percent in February from 5.7 percent in January, but CBSL says this is solely due to the comparison with a low rate in February last year.
Core inflation, which reflects underlying inflation, rose to 3.2 percent from 3.0 percent while the average core rate eased to 5.1 percent in February from 5.3 percent in January.
The central bank said it expects inflation to stabilize within its desired range of 4-6 percent over the medium term.
Sri Lanka's rupee, which fell in the second half of 2018, has been relatively stable in recent months and was trading around 182 to the U.S. dollar today, marginally down from 181.7 at the start of the year.
The Central Bank of Sri Lanka released the following statement:
"The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 04 March 2020, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 6.50 per cent and 7.50 per cent, respectively, and thereby continue its accommodative monetary policy stance. The Board arrived at this decision following a careful analysis of the current and expected developments in the domestic economy and the financial market as well as the global economy. The decision of the Monetary Board is consistent with the aim of maintaining inflation in the 4-6 per cent range while supporting economic growth to reach its potential over the medium term.
Many economies are becoming increasingly accommodative amidst global growth concerns
The escalation of the coronavirus (COVID-19) outbreak to a ‘global health emergency’ and its potential to become a pandemic pose significant threats to global economic recovery in 2020. The widespread impact on China, the world’s second largest economy, will have spillover effects on the global economy through weakening trade, tourism and investment flows. The recent rapid rise in cases outside China highlights the high degree of health and economic contagion that the outbreak entails. Policymakers around the globe are expected to intensify policy support to address the effect of the outbreak on global demand and supply conditions, while monetary policies in both advanced economies and emerging market and developing economies are projected to be relaxed at a faster pace than previously envisaged.
Many economies are becoming increasingly accommodative amidst global growth concerns
The escalation of the coronavirus (COVID-19) outbreak to a ‘global health emergency’ and its potential to become a pandemic pose significant threats to global economic recovery in 2020. The widespread impact on China, the world’s second largest economy, will have spillover effects on the global economy through weakening trade, tourism and investment flows. The recent rapid rise in cases outside China highlights the high degree of health and economic contagion that the outbreak entails. Policymakers around the globe are expected to intensify policy support to address the effect of the outbreak on global demand and supply conditions, while monetary policies in both advanced economies and emerging market and developing economies are projected to be relaxed at a faster pace than previously envisaged.
The COVID-19 outbreak is likely to affect Sri Lanka’s economic performance
The exact impact on the Sri Lankan Economy would depend on the extent of the global spread of the COVID-19 outbreak, its persistence and policy responses of major economies and trading partners. Sri Lanka’s economic links with China could be directly affected as significant volumes of consumer goods, intermediate goods and investment goods are imported from China. The likely slowdown of the global economy and disruptions to the supply chain could affect Sri Lanka’s merchandise and service exports as well as related logistics. The slowdown in global tourist movements will affect Sri Lanka’s tourism sector, in addition to the direct impact of lower arrivals from China. The spread of the virus to countries with a significant number of Sri Lankan migrant workers could affect remittance inflows as well. These adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates.
Continued policy support would ensure a gradual recovery of domestic economic activity over the medium term
Despite global disruptions to growth caused by the spread of COVID-19 and uncertainties in the domestic market due to upcoming elections and the delayed presentation of the annual government budget, the economy is expected to somewhat recover in 2020 from the current subpar performance, supported by monetary and fiscal stimulus measures complemented by improving investor confidence. However, the introduction of appropriate structural reforms is essential to foster high economic growth, given limited policy spaces available to sustain such momentum over the medium to long term.
External sector remains resilient despite rising global uncertainties
A notable improvement was observed in the external current account balance in 2019, with the trade deficit contracting significantly as a result of a sharp decline in the growth of imports and a marginal growth of exports. The tourism sector witnessed a faster than expected recovery in 2019 following the Easter Sunday attacks. Yet, the COVID-19 outbreak is likely to pose challenges to the tourism sector in the period ahead. Workers’ remittances that moderated in the first eleven months of 2019, showed an improvement in December 2019 as well as January 2020. In the meantime, foreign investment in rupee denominated government securities recorded a net outflow thus far in 2020, partly due to increased investor appetite for safe haven assets amidst rising global uncertainty. Outflows of foreign investment from the secondary market of the Colombo Stock Exchange (CSE) remained modest thus far during the year. Reflecting these developments, the Sri Lankan rupee remained broadly stable with a marginal depreciation, while gross official reserves stood at US dollars 7.5 billion by end January 2020, sufficient to cover 4.5 months of imports.
The exact impact on the Sri Lankan Economy would depend on the extent of the global spread of the COVID-19 outbreak, its persistence and policy responses of major economies and trading partners. Sri Lanka’s economic links with China could be directly affected as significant volumes of consumer goods, intermediate goods and investment goods are imported from China. The likely slowdown of the global economy and disruptions to the supply chain could affect Sri Lanka’s merchandise and service exports as well as related logistics. The slowdown in global tourist movements will affect Sri Lanka’s tourism sector, in addition to the direct impact of lower arrivals from China. The spread of the virus to countries with a significant number of Sri Lankan migrant workers could affect remittance inflows as well. These adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates.
Continued policy support would ensure a gradual recovery of domestic economic activity over the medium term
Despite global disruptions to growth caused by the spread of COVID-19 and uncertainties in the domestic market due to upcoming elections and the delayed presentation of the annual government budget, the economy is expected to somewhat recover in 2020 from the current subpar performance, supported by monetary and fiscal stimulus measures complemented by improving investor confidence. However, the introduction of appropriate structural reforms is essential to foster high economic growth, given limited policy spaces available to sustain such momentum over the medium to long term.
External sector remains resilient despite rising global uncertainties
A notable improvement was observed in the external current account balance in 2019, with the trade deficit contracting significantly as a result of a sharp decline in the growth of imports and a marginal growth of exports. The tourism sector witnessed a faster than expected recovery in 2019 following the Easter Sunday attacks. Yet, the COVID-19 outbreak is likely to pose challenges to the tourism sector in the period ahead. Workers’ remittances that moderated in the first eleven months of 2019, showed an improvement in December 2019 as well as January 2020. In the meantime, foreign investment in rupee denominated government securities recorded a net outflow thus far in 2020, partly due to increased investor appetite for safe haven assets amidst rising global uncertainty. Outflows of foreign investment from the secondary market of the Colombo Stock Exchange (CSE) remained modest thus far during the year. Reflecting these developments, the Sri Lankan rupee remained broadly stable with a marginal depreciation, while gross official reserves stood at US dollars 7.5 billion by end January 2020, sufficient to cover 4.5 months of imports.
Inflation is expected to stabilise within the desired range over the medium term despite transitory deviations arising from supply side disruptions
In January and February 2020, headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI) showed an unexpected uptick, driven by a rapid acceleration in food inflation. Headline inflation based on the National Consumer Price Index (NCPI), which has a higher weight on food, also recorded a notable acceleration in January 2020. However, reflecting the subdued aggregate demand conditions, core inflation based on both CCPI and NCPI currently remains below 4 per cent. Meanwhile, vegetable prices showed a sharp downward adjustment since end February with improving supply conditions. Accordingly, the latest projections indicate that inflation would decline in the near term and stabilise within the desired range thereafter. Although demand driven inflationary pressures in the near term are not envisaged, the Central Bank will continue to closely monitor incoming data and take proactive measures to ensure the continued anchoring of inflation expectations in mid single digit levels.
An acceleration in the growth of money and credit aggregates was observed in January 2020
The year-on-year growth of credit extended to the private sector by commercial banks continued to accelerate in January 2020, although the absolute increase during the month was marginal compared to the average monthly increases observed since August 2019. Meanwhile, credit to the government increased notably in January 2020, reflecting its increased financing needs. Driven by the domestic credit expansion, broad money growth (year-on-year) also accelerated in January 2020. With the ongoing pass-through of policy measures to market lending rates and improving business confidence, the growth of credit to the private sector is expected to accelerate further, thereby supporting the envisaged expansion in economic activity in the period ahead.
Market lending rates are expected to reduce further
Market lending rates continued to decline as a result of the accommodative monetary policy stance and the regulatory measures taken by the Central Bank over the past several months. However, a faster downward adjustment in market lending rates is required to pass the full benefit of recent policy measures to borrowers, thereby to the economy.
In January and February 2020, headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI) showed an unexpected uptick, driven by a rapid acceleration in food inflation. Headline inflation based on the National Consumer Price Index (NCPI), which has a higher weight on food, also recorded a notable acceleration in January 2020. However, reflecting the subdued aggregate demand conditions, core inflation based on both CCPI and NCPI currently remains below 4 per cent. Meanwhile, vegetable prices showed a sharp downward adjustment since end February with improving supply conditions. Accordingly, the latest projections indicate that inflation would decline in the near term and stabilise within the desired range thereafter. Although demand driven inflationary pressures in the near term are not envisaged, the Central Bank will continue to closely monitor incoming data and take proactive measures to ensure the continued anchoring of inflation expectations in mid single digit levels.
An acceleration in the growth of money and credit aggregates was observed in January 2020
The year-on-year growth of credit extended to the private sector by commercial banks continued to accelerate in January 2020, although the absolute increase during the month was marginal compared to the average monthly increases observed since August 2019. Meanwhile, credit to the government increased notably in January 2020, reflecting its increased financing needs. Driven by the domestic credit expansion, broad money growth (year-on-year) also accelerated in January 2020. With the ongoing pass-through of policy measures to market lending rates and improving business confidence, the growth of credit to the private sector is expected to accelerate further, thereby supporting the envisaged expansion in economic activity in the period ahead.
Market lending rates are expected to reduce further
Market lending rates continued to decline as a result of the accommodative monetary policy stance and the regulatory measures taken by the Central Bank over the past several months. However, a faster downward adjustment in market lending rates is required to pass the full benefit of recent policy measures to borrowers, thereby to the economy.
Policy interest rates maintained at current levels
In consideration of the current and expected macroeconomic developments as highlighted above, the Monetary Board, at its meeting held on 04 March 2020, was of the view that the current accommodative monetary policy stance is appropriate, and decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 6.50 per cent and 7.50 per cent, respectively. The Monetary Board was also of the view that there is ample space for market lending rates to reduce without a further adjustment in policy rates at this juncture. Such downward adjustment in the market lending rates would also help weather any short term impact on financial markets and the real economy arising from the COVID-19 outbreak. The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments, including the impact of the spread of COVID-19 globally and its effects on Sri Lanka, with a view to maintaining stable economic conditions in the period ahead, while standing ready to provide liquidity to domestic financial markets as necessary."
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