Sri Lanka Confident of Monetary Policy Easing Bias, Cabraal Says

Sri Lanka’s central bank is confident the time has come to ease rather than tighten monetary policy, Governor Ajith Nivard Cabraal said today in a Bloomberg Television interview after holding key interest rates following a surprise cut in December, the first since 2011.

On monetary policy:

“We think that the rates as it is are appropriate. We do see inflation moderating, even though there is some possibility that there could be some kind of a slight hike in the next two months.

‘‘But we know that the demand-driven pressures are very clearly addressed, so therefore we are quite confident that the time has now come to ease monetary policy than to tighten monetary policy.

‘‘So in the next few months we will be watching the progress carefully to see how the external account is behaving, which has been doing reasonably well these last six months. That would give us the opportunity of taking a decision on whether we need to loosen monetary policy further during the course of the first half.’’

On inflation versus growth:

‘‘We believe the inflation-containment goal has been on track and the time has now come for us to look into the possibility of giving a little more support to the growth function, as well.

‘‘And that is what is prompting us to keep monetary policy in a kind of a slow-motion reduction, so that we would be encouraging growth to take place, which we see is being driven by many supportive factors.

‘‘So the next few months we believe that since inflation is pretty much under control and we would be able to see inflation in the mid-single digit numbers by the end of this year, the greater focus would have to be for growth, greater focus would be to maintain stability and to ensure that the industries that Sri Lanka has been promoting, are given the necessary investor support to take it forward.’’

On the rupee:

‘‘We did see the rupee taking a steep depreciation in the first half of last year. But over the last six months, we have also seen the rupee pulling back and there has been appreciation of around 6 percent, which tells us that whatever happens in the next few months, it should be a slower process than what we have experienced.

‘‘So we are encouraging the rupee to stay stable and although the outlook seems to be that there would be mild pressure for the rupee to appreciate, we would like to see that being handled or moving in a fairly reasonable and slow pace rather than to have any volatile movement.

‘‘We are satisfied where it is because it gives a very good handle for importers, exporters, lenders as well as borrowers and we would like to see any movement to be slow rather than being volatile as we have experienced sometime in the first half of last year.’’

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