The Governor of the Central Bank of Sri Lanka, Dr. Indrajit Coomaraswamy yesterday said that he is confident last week’s 50 basis point rate hike announced by the Central Bank will not have much of an impact on the targeted economic growth of 5 to 5.5% for this year. The Monetary Board on Thursday announced the decision to increase the main policy interest rates of the Central Bank, namely, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), by 50 basis points each, to 7.00 per cent and 8.50 per cent, respectively.
“There have been a few factual changes in the macro economic position since I spoke to the media about three weeks ago. Though I thought there might be some easing in the private sector credit growth, that did not happen and it continues to be buoyant higher than the desirable level,” Coomaraswamy said pointing out that the desirable level of credit growth is 20%.
Secondly, he noted that due to the delay in legislating the VAT Amendment Bill, due to pending court cases, there has been some uncertainty in revenue collection. Further he noted that the Board is also of the view that tightening of monetary policy in a forward looking manner will ensure the maintenance of inflation at mid-single digits in the medium term, which is supportive of the growth momentum in the economy
“We still think we can achieve an economic growth rate of 5% or even more as the number of proxies for growth are pretty robust,” Coomaraswamy, who took over as the Governor at the beginning of this month, said.
Meanwhile, Assistant Governor of the Central Bank C J P Siriwardena, who delivered a presentation said the Monetary Board considers that further tightening of monetary policy is required to curb excessive demand in order to pre-empt the escalation of inflation pressures while the adjustment is not expected to have significant impact on the long end of the yield curve According to the Central Bank, in spite of the increase in market interest rates, credit granted to the private sector by commercial banks increased at the high pace of 28.0 per cent, year-on-year, in May 2016, in comparison to 28.1 per cent in April 2016.
The sustained increase in domestic credit also caused a wider trade deficit. Accordingly, the cumulative trade deficit during the first five months of 2016 registered an increase of 1.4 per cent, year-on-year.