Arjuna Mahendran | Pic by Chandana Wijesinghe

The rationale for the recent 0.5% rate hike announced by the Central Bank was to stifle the creation of a credit bubble as private sector credit growth expanded heavily in 2015 triggering inflationary pressures, the governor of the Central Bank, Arjuna Mahendran explained last week. The Bank, in its Monetary Policy Review released recently for February said 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 percent in December 2015 in comparison to 8.8 percent 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. “Unfortunately we had to step in to because we are also primarily concerned that people who borrowed money last year are now finding it difficult to service their debt,” Mahendran said adding that the regulator’s role was to ensure stability in the financial system.

The Policy Review statement said Broad money (M2b) had continued to grow at a high pace, recording a growth of 17.8 percent (year-on-year) in December 2015 compared to 13.4 percent in December 2014.

The Monetary Board increased 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 percent and 8.00 percent, respectively, effective from the close of business on 19 February 2016.

Capital outflows mar oil bill savings
Despite the country’s fuel import bill declining by a sharp 41% in 2015 compared to year 2014, the saving from the oil bill as a result of the reduction in the oil prices, has however to some extent been offset by capital outflows, the Governor of the Central Bank said. Arjuna Mahendran said the rapid outflow of foreign capital was a result of the foreign investor’s fear of currency devaluation.

“So to ensure those investors remain in Sri Lanka we had to also give our investors higher returns, and that’s the other reason we had to raise rates to prevent the currency from free fall,” Mahendran noted.