Central bank holds key policy rates; ready to provide liquidity to domestic financial markets support economy

Colombo (News 1st) - The central bank on Thursday left the key policy rates unchanged amid the expected economic slowdown due to the naval coronavirus locally and globally, but said it will stand ready to provide liquidity to domestic financial markets as necessary and aim to maintain the inflation at 4-6 percent range to support the ailing economy. “The exact impact on the Sri Lankan Economy would depend on the extent of the global spread of the COVID-19 outbreak, its persistence and policy responses of major economies and trading partners,” the central bank said in a statement. The bank said that Sri Lanka’s economic links with China could be directly affected as significant volumes of consumer goods, intermediate goods and investment goods are imported from China. “The likely slowdown of the global economy and disruptions to the supply chain could affect Sri Lanka’s merchandise and service exports as well as related logistics. The slowdown in global tourist movements will affect Sri Lanka’s tourism sector, in addition to the direct impact of lower arrivals from China,” it further said. The central bank also said that the spread of the virus to countries with a significant number of Sri Lankan migrant workers could affect remittance inflows and these adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates. The bank said the Policymakers around the globe are expected to intensify policy support to address the effect of the outbreak on global demand and supply conditions, while monetary policies in both advanced economies and emerging market and developing economies are projected to be relaxed at a faster pace than previously envisaged. On Tuesday the U.S. Federal Reserve cut interest rates in a bid to shield the world’s largest economy from the impact of the coronavirus, but the emergency move failed to comfort U.S. financial markets roiled by worries about a deeper, lasting slowdown. The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 04 March 2020, decided to continue its accommodative monetary policy stance and to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 6.50 per cent and 7.50 per cent, respectively. The bank also said that the Monetary Board was also of the view that there is ample space for market lending rates to reduce without a further adjustment in policy rates at this juncture. Such downward adjustment in the market lending rates would also help weather any short term impact on financial markets and the real economy arising from the coronavirus outbreak.“The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments, including the impact of the spread of coronavirus globally and its effects on Sri Lanka, with a view to maintaining stable economic conditions in the period ahead, while standing ready to provide liquidity to domestic financial markets as necessary,” the bank said Sri Lankan central bank’s decision comes after the central bank cut both its key interest rates by 50 basis points in an unexpected move in January to support an economic recovery, the third cut in less than nine months, having first cut rates in May following the Easter bomb attacks that triggered a slump in investments and tourism in a blow to domestic growth. The central bank also said despite global disruptions to growth caused by the spread of coronavirus and uncertainties in the domestic market due to upcoming elections and the delayed presentation of the annual government budget, the economy is expected to somewhat recover in 2020 from the current subpar performance, supported by monetary and fiscal stimulus measures complemented by improving investor confidence. “However, the introduction of appropriate structural reforms is essential to foster high economic growth, given limited policy spaces available to sustain such momentum over the medium to long term,” it said. The private sector credit growth accelerated for the second straight month in January. The year-on-year growth of credit extended to the private sector by commercial banks was 4.5 percent in January with compared to Decembers 4.3 percent. The central bank also said that the credit to the government increased notably in January 2020, reflecting its increased financing needs. “With the ongoing pass-through of policy measures to market lending rates and improving business confidence, the growth of credit to the private sector is expected to accelerate further, thereby supporting the envisaged expansion in economic activity in the period ahead.”