CBSL governor Prof. W D Lakshman said the Monetary Board decision was intended to affirm its accommodative monetary policy stance and also create a further reduction in cost of funds raised by the financial institutions thereby allowing them to pass the benefits of reduced cost of funds to the economy.
“Both took into consideration several macro economic developments in making this decision” Prof. Lakshman said.
He said further that this decision supports a continued reduction in market lending rates, thereby facilitating the envisaged recovery in economic activity given the favourable medium -term outlook for inflation, which is well anchored within the 4-6 per cent range.
“On the inflation front, the recent acceleration of inflation particularly at the national level has been a concern. However, there were several factors suggest that this acceleration in inflation is going to be short- lived and this acceleration was caused by food inflation rather than any overheating of the economy.” Prof. Lakshman said.
Domestic supply conditions are already gradually improving and CCPI based inflation has continued to remain within 4-6% range, which CBSL is targeting.
“The growth has remained subdued, economic growth in 2019 is likely to be around 3.6% and there has been a notable improvement in business confidence caused by political stability and targeted measures taken by relevant authorities.
With these developments, the growth is likely to start going up and will exceed 4% in 2020.”
Credit to the private sector has gradually commenced expanding .Revival in confidence and revival in economic activities, fiscal measures credit relief package , declining interest rates will help sustain acceleration of credit growth over time, he said.
“Although market lending rates are generally on a declining path, we were at the Monetary board was of the view that lending rates should continue to decline and this was the key factor that supported the decision of the Board.”
He said further that global economic conditions have been subdued and many advanced and emerging market economies have marinated accommodative monetary policies to address those concerns.
External sector conditions will be monitored closely and managed with appropriate measures of macro prudential, fiscal and monetary measures.
Moreover, he stressed that the monetary policy decision will support a continued reduction in market lending rates, ensuring a broad based and sustained recovery in economic activity. It is essential that market lending rates reduce further in order to support the envisaged pick up in credit growth and economic activity.
The CBSL will continue to monitor macroeconomic and financial market development with a view to maintaining aggregate demand conditions at appropriate levels, thereby ensuring single digit inflation in the medium term. Headline inflation, as measured by the year-on-year change in Colombo Consumer Price Index (CCPI), accelerated in December 2019 owing to domestic supply disruptions. In spite of such short term fluctuations, the near term forecast suggests that inflation will hover below 5 per cent in 2020, and stabilise between 4-6 per cent thereafter, assisted by appropriate policy measures and underpinned by well anchored inflation expectations.
He added that there has been notable improvement in the external current account despite disruptions that the country faced in 2019.The Exchange rate has remained stable in 2019 as well as in January 2020, he noted
“ There are renewed uncertainties of the global economic activities with the spread of the Coronavirus , which has already caused some disruptions to travel and tourism industry and resulted in volatility in currency and commodity markets,” Prof. Lakshman added.
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