The Central Bank of Sri Lanka (CBSL) this week adopted a “wait and see” approach in terms of policy rates to provide some space for the transmission of the policy rate reductions announced on 31 May and other related measures. In the fourth monetary policy review meeting for 2019 on Thursday (11), CBSL decided to maintain its policy rates, following a reduction of rates in its third monetary policy review in May. Addressing the media, CBSL Governor Indrajith Coomaraswamy noted the Monetary Board decided to not to reduce the policy rates in order to assess the full effects of the rate cut in May and the increased liquidity. “Now we have data; some of them are up to May, some are for May and June. Monetary policy transmission takes a bit of time. This is not just the policy rate reduction on 31 May, but the two SRR reductions and the Rs. 150 billion infusion of permanent liquidity, Rs. 100 billion the Government paid back in arrears, and the infusion of Rs. 300 million on each electorate under the ‘Gamperaliya’ programme. So we would like to wait and see the overall impact of this money being put into the system.” However, even though CBSL decided to maintain the rates to gauge the impact of the previous reduction, the monetary policy is still in a relaxing mode, according to the Governor. If the requirement arises for further relaxation, it would be considered at the next Monetary Board meeting. In spite of the decision to keep rates steady, the Governor noted five internal and external factors which argued for another rate cut, including a dovish monetary policy stance globally, trends in private sector credit growth, and a continuing output gap. The monetary policy stance of the major central banks around the world, notably of the US Federal Reserve System (Fed), has continued to be dovish. As a result, there has been a move towards concerted monetary policy action by other central banks to shore up growth globally. In addition to this, global growth has weakened due to trade and geo political tensions, particularly between the US and China. The Governor pointed to the continuing output gap as the second factor which would possibly argue for a relaxation of monetary policy. “The potential growth rate is 5%. We are around 3%, so clearly there is this output gap.” Decelerating trend of private sector credit growth is the next factor as the first five months of the year saw an estimated Rs. 29 billion of contraction in credit growth. However, the Governor said even though Rs. 100 billion was used by the Government to repay arrears during the first three to four months of the year for outstanding advances, private sector credit growth would still have decelerated. Continuing increase in the exports and compression of imports was the fourth factor. Significant improvement in the trade account both due to a compression of imports as well as an increase in exports has been encouraging, according to him. However, he added that continued export growth is critical if the country is to get out of the debt dynamics that it has been caught up in. He cited inflation as the fifth and final factor arguing for a rate cut as it continues to be subdued and inflation expectation and the outlook is well anchored. He noted that the only reason CBSL wanted to be careful about relaxing policy is that there is evidence now that there could be fiscal slippages due to the Easter attacks as well as import compression that Sri Lanka is seeing outside the effects of the Easter attacks. In addition to this, the Government’s revenue and import duty collection has come down. As a result of a low level of economic activity, Value Added Tax (VAT) and Income Tax are likely to be affected. “Expenditure is also is likely to be higher.” The Central Bank on Thursday decided to hold policy rates with the aim of maintaining inflation in the desired 4-6% range while supporting economic growth to reach its potential over the medium term. Therefore, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank remain at their current levels of 7.5% and 8.5%, respectively. Photo Saman Abesiriwardena