Market lending rates, state borrowing to ease in 2H’13: CB

The bank lending rates will further decline during the 2H’2013, following the aggressive rate cut of 50 basis points in May, Central Bank (CB) said yesterday issuing the monetary policy review for June, leaving the rates steady as expected.

The Monetary Board also expected public sector borrowings to ease further during the remainder of the year providing much room for longer term credit growth in the private sector.

“It is expected that the easing of monetary policy since December 2012 would transmit smoothly to the lending rates in the near future, thereby stimulating a sustained increase in longer term credit growth to the private sector, thus contributing to a higher level of economic activity, over the coming months,” the policy review said.

In May, both the repurchase and the reverse repurchase rates were cut by 50 basis points each to 7.00 percent and 9.00 percent respectively, taking the financial markets by surprise to stimulate the slower than expected pick-up in economic activity in the first few months of 2013.

“The reduction in policy rates by 50 basis points in May 2013 has already been reflected on the deposit rates of major commercial banks, while the average weighted call money rate and the average weighted prime lending rate have also moved downwards,” the CB said.

However the energy prices, particularly the electricity tariff hike pushed the headline inflation to 7.3 in May from 6.4 percent in April even before the full impact of the relaxed monetary policy environment set in.

The International Monetary Fund continuously kept policy rates on hold, watching the inflation. However the CB Governor, Ajith Nivaard Cabraal justified the 50 bp cut, reasoning out that it would reduce the uncertainty in the market about future costs indicating a stable policy-rate environment for the remainder of the year.

“Going forward, inflation is expected to remain at single digit levels, supported by supply side improvements and the absence of demand-driven inflationary pressures,” the CB maintains.

Meanwhile the Year-on-Year (YoY) broad money (M2b) growth has moderated further in April 2013 to 15.2 percent from 15.6 percent in the previous month. The private sector credit growth too decelerated to 10.2 percent in April on YoY basis from 10.9 percent in March.

In the external sector, the Balance of Payments has continued to be in surplus so far during the year and the CB expects the trend to continue improving it further. The CB claims it has absorbed around US $ 580 million from the domestic foreign exchange market on a net basis, supported by increased earn- ings from trade in services, workers’ remittances and investment inflows.

By the end of April, the gross official reserves stood at US $ 6.9 billion, equivalent to 4.4 months of imports.