GDP growth for 3Q 2017 was lower than expected (grew by 3.3% YoY) with overall agricultural activities reporting a negative growth mainly due to the unfavorable weather conditions (severe drought as well as heavy rainfall) that prevailed during the last two years in many districts of the country, FC Research said in its December pre-policy analysis.
During the third quarter of 2017, the ‘Services Activities’ continued to expand further by 4.3%, while ‘Industrial Activities’ recorded a marginal growth rate of 1.9%.
FC Research in August 2017 upgraded private sector credit growth for 2017E to 16% from 14% forecasting a possible pickup towards year end. Private sector credit figure decelerated to Rs 50 billion in September 2017 despite slowdown in the credit in August. FC Research believes overall credit is likely to continue to remain under check.
CCPI-based headline inflation, decelerated on a YOY basis to 7.6% in November 2017 (exceeding FC Research’s estimate of 7.0%) from 7.8% in October 2017. NCPI-based inflation accelerated on a YOY basis to 7.5% in November 2017 from 7.1% in October 2017.
However, core inflation remained under check decelerating to 5.2% in November 2017 from 5.8% in October 2017. FC Research forecast for December 2017 is for CCPI headline inflation to beat 7.2%. FC Research believes inflation will be under control over the next 2-3 months while there could be some upward pressure towards 2Q 2018.
Sri Lanka’s forex reserves assets dropped by US$ 171 million to US$ 7.32 billion in November which was equivalent to about 4.5 months of imports from US$ 6.0 billion reserve at end 2016.
The Central Bank had net purchased US$ 1.46 billion on a net basis from currency markets so far this year.
FC Research believes foreign reserves are now at comfortable levels and are likely to end the year around the US$ 7.5 billion mark.
During the last three months, the Central Bank brought down its holding in government securities from Rs 60 billion to below Rs 1 billion as at December 22.
Economists said the Fed will still pencil in three hikes for 2018 (March 2018, June 2018 and December 2018), but moved forward one of those projected moves to March 2018 from June 2018.
FC Research believes that despite inflation remaining high, GDP growth and credit growth are below its expectation. Considering the above macroeconomic environment, current monetary policy is appropriate and no change is required. FC Research expects the Central Bank to keep the Statutory Reserve Ratio (SRR) unchanged at 7.50%.
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