Central Bank keeps policy rates steady
The Monetary Board of the Central Bank of Sri Lanka yesterday decided to maintain policy interest rates at their current levels amidst monetary policy tightening in the United States and other major economies, strengthening of the US dollar, pressures on currencies of many emerging market economies and escalating trade tensions.
Accordingly, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 7.25 per cent and 8.50 per cent, respectively.
CBSL Governor Indrajith Coomaraswamy said, “The global interest rates are easing up. We see particularly the benchmark US bond deals going up recent days once again, which is a factor for policy tightening in advanced countries. So if we allow the differential between our rates and the benchmark rates, particularly US to be reduced, then clearly there is an incentive for foreign investors in government securities to move out. There has been already some outflow, but if that differential gets squeezed, you could see acceleration of that outflow.”
The net rupee denominated government security market has experienced a net outflow of US$229 million by foreign investors up to first of August this year. Despite an outflow of US$16.3 million from the secondary market, the Colombo Stock Exchange (CSE) attracted a net inflow of US $44.7 million as a result of primary market transactions.
He noted that a number of emerging market countries has increased their interest rates and hence, the loosening of Sri Lanka monetary policy would have an adverse impact on government securities.
“If we reduce our interest rates while these countries are reducing it, then we could see some repositioning which could have an adverse impact on the investment of foreign money in our government securities,” he noted.
Sri Lanka’s gross official foreign reserves position is estimated at around US$8.4 billion by end of July, and the CBSL has absorbed US$133.9 million from the domestic market by the end of July in defending the rupee as it depreciated by 4.3 percent this year, mainly reflecting the US$’S broad based strengthening in global markets.