Monetary Policy Review January 2011:
Inflation remains at single digit
Inflation has continued to hover around mid-single digit levels,
although weather related factors and supply disruptions have led to
increases in prices of some selected food items time to time, the
Central Bank said.
Inflation, as measured by the year-on-year change in the Colombo
Consumers’ Price Index (base=2002) was 6.9 per cent in December 2010.
Annual average inflation in 2010 was 5.9 per cent.
Price increases in the domestic economy are expected to have only a
transient effect on domestic inflation, and current monetary
developments do not indicate any significant demand pressures in the
economy emanating from second round effects of these price increases.
The continued stability of the Sri Lanka rupee has also cushioned
price increases of imported commodities, while measures taken by the
government, particularly downward adjustments to tariffs applicable to
imported commodities, helped reduce price pressures further, the Central
Bank said.
In the coming months, domestic agricultural production is expected to
increase along with the increase in the extent of land cultivated.
In addition, the enhanced capacity utilisation in many sectors of the
economy, with the development of infrastructure, reasonable productivity
gains and greater efficiency of capital employed, would help ease
domestic price pressures.
By November 2010, year-on-year growth in credit granted to the
private sector by commercial banks was 23 per cent, partly due to the
base effect, given that a negative growth of around 6 per cent was
recorded for November 2009.
During the same time frame, growth in broad money supply in 2010
recorded an average value of around 15 per cent, thus remaining
consistent with the target stipulated in the monetary program for 2010.
Data relating to developments on the fiscal front indicate that the
deficit in the national budget would be well within the targeted 8 per
cent of GDP in 2010. Meanwhile, the government remains committed to
securing a budget deficit of 6.8 per cent of GDP in 2011 with current
indications showing that such deficit target is very likely to be
achieved.
The favourable macroeconomic environment provides the required space
and comfort for new and wider investments to be made in all sectors of
the economy, including new growth areas, without fuelling undue
inflationary pressures in the period ahead, thereby firmly supporting
the country’s growth potential.
In that scenario, the encouragement of substantial and sustained
private sector participation in economic activity in the years ahead,
would be vital.
A reasonable relaxation of the Central Bank’s monetary policy stance
would be appropriate and timely. Such policy stance would result in a
further reduction in market interest rates, which would reflect the
lower risk premia that is expected to prevail in the period ahead,
without increasing the inflationary pressures in the economy, CBSL said.
The Monetary Board, at its meeting held on January 10 has decided to
reduce the Central Bank’s Repurchase rate by 25 basis points and the
Reverse Repurchase rate by 50 basis points to 7.00 per cent and 8.50 per
cent, respectively, from January 11.
|