The Central Bank of Sri Lanka has released the monetary policy review for the month of July 2010. Again in Microsoft word format. I have puvlished the report in it’s entirety and you can also down load a copy of the same report in PDF format. Please follow the link given after the article to down load or to view the PDF file.
Monetary Policy Review – July 2010
The Monetary Board, at its meeting held today, has decided to reduce the Repurchase rate and the Reverse Repurchase rate by 25 basis points each with immediate effect. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would be 7.25 per cent and 9.50 per cent, respectively.
The monetary policy stance of the Central Bank was gradually eased during 2009 in view of the decline in inflationary pressures and the slowdown in economic activity. Several favourable developments were observed in response to the monetary policy measures taken by the Central Bank.
Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002) (CCPI) has continued to decline, for the fourth consecutive month, reaching 4.8 per cent in June 2010, while annual average inflation reached 3.9 per cent in June. Strong growth in the domestic agriculture sector, as well as a decline in the price of key food items in the international market has had a favourable impact on the CCPI. Going forward, inflation is expected to remain subdued, at single digit levels, during the remainder of the year.
Growth in broad money continued to moderate during the first five months of the year. By end May 2010, the year-on-year growth in the broad money supply was 15.5 per cent compared to 18.6 per cent at end 2009. Credit flows to the private sector have been increasing since the latter part of 2009, and reached a year-on-year growth of 3.5 per cent by end May in contrast to a contraction of 5.7 per cent at end 2009. Credit to the private sector needs to continue to expand in the coming months as economic growth picks up. External trade also showed strong signs of recovery during the first four months of the year with exports increasing by 10.7 per cent and non-oil imports increasing by 29 per cent. The gross official reserves of the country including forex swaps were further enhanced by the receipt of two tranches of the IMF-SBA Facility to approximately US dollars 5.7 billion, as at 30 June 2010, which is equivalent to 6 months of imports. GDP growth in the first quarter of 2010 has been estimated at 7.1 per cent and the economy is expected to expand by around 7 per cent during the year. Taking into consideration these developments in the economy the Monetary Board has decided to revise the policy interest rates downward. In response to this, lending rates of commercial banks are expected to adjust further downward, stimulating economic activity.
The Central Bank has also decided to revise the monetary programme for 2010, and accordingly, the targets for reserve money and broad money, which were published in the “Road Map: Monetary and Financial Sector Policies for 2010 and beyond”, on account of the subsequent developments in the economy. The key factors underlying this revision are an expected increase in the growth in nominal GDP and the inclusion of information on the fiscal sector from Budget 2010, which was presented to Parliament in June 2010. Broad money is expected to grow at a rate commensurate with the revised nominal GDP growth of 14.5 per cent. The budget for 2010 envisages that the deficit would be contained at 8 per cent in 2010, with further reductions expected in 2011 and beyond. Several developments within the monetary aggregates, which were observed during the first half of the year, have also underscored the need for a revision. Expansion in reserve money was higher than expected, particularly during the first quarter of 2010, partly due to increased demand for currency with the end to the conflict. As a result, the money multiplier has also shown a contraction, requiring a higher amount of reserve money to maintain broad money within the targeted levels. Considering these developments, the targets for quarterly growth in reserve money for the third and fourth quarters of 2010 are revised as follows:
Revised Targets for 2010 (quarterly average)
|Revised Targets – 2010|
|year-on-year growth (%)||21.6||19.7||21.2|
The release of the next regular statement on monetary policy will be on 20 August 2010.