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CB to keep policy rates unchanged

Published on Ceylon Today | 2017-08-02

The Central Bank (CB) will keep its key policy interest rates unchanged with slower credit growth and improved economic conditions, economists and analysts predicted yesterday.

“Sri Lanka’s economic health was almost back to normal but the prevailing drought may hurt the economy further”, they said. Speaking to Ceylon FT, Finance Ministry Secretary, Dr. R.H.S Samarathunga confirmed that the prevailing drought might impact on agriculture sector output.

GDP growth for 1Q 2017 was slower than expected, growing only 3.8%YoY in the 1Q2017 with the agriculture sector decreasing 3.2%YoY with the drought. Meanwhile, releasing the pre monetary policy statement, First capital (FC) stockbroker Research expects the Central Bank of Sri Lanka (CBSL) to keep the Statutory Reserve Ratio (SRR) unchanged at 7.50%.

FC Research expects growth in private credit to descend to around 18% to 20% from the current level of over 20%. In April and May, private sector credit slowed down steeply than expected levels. During the last one month, CBSL brought down its holding in Government Securities from Rs 214 billion to below Rs135 billion as at 28 July.

The Colombo Consumer Price Index (CCPI) based headline inflation, declined on a YOY basis to 4.8% in July 2017 from 6.1% in June 2017 and CCPI based core inflation also decelerated to 4.9% in July 2017 from 5.1% in June 2017.

FC Research forecasted July 2017 CCPI headline inflation to be at 5.8% and CCPI core inflation at 5.3%. July inflation witnessed a steep decline below expectation, due to the reduction of prices in certain laboratory tests dipping health care expenses and drop in vegetable and sea fish prices thus reducing food prices. NCPI based inflation also decelerated on a YOY basis to 6.3% in June 2017 from 7.1% in May 2017.

FC Research believes that inflation will be under control over the next two months, while there could be some upward pressure towards September and beyond with the floods in May 2017 affecting the supply in the current growing season and VAT increases not applying to the same period last year. “As a result there could be possible supply side shortages towards September and beyond,” they said.

Sri Lanka’s forex reserves rose to USD 6.95 billion in June 2017 from USD 6.74 billion in May, helped by foreign inflow into both the Bond & Equity market and continuous dollar purchases by CBSL. (IG)


The comments on this report are provided by the Capital Markets Research Unit of First Capital Holdings PLC an investment bank in Sri Lanka.

The company operates in the capital markets of Sri Lanka in government securities – treasury bills and bonds, stock brokering and share market investments, asset management, private wealth management,  retirement planning, personal financial planning, unit trust, margin trading, capital market research, trustee services, corporate finance advisory services including corporate debt structuring (debentures, trust certificates, commercial papers), valuations, restructuring, mergers and acquisitions, initial public offerings (IPOs) and project advisory. 

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.<