Inflation to remain at desired levels despite transitory supply side pressures
Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI) accelerated in September 2019 driven by increased prices of domestic food supplies. Headline inflation based on the National Consumer Price Index (NCPI), which attributes a larger weight to food items, is also likely to accelerate in September. Food inflation is expected to cause headline inflation to remain somewhat elevated during the remainder of 2019. However, with these transitory supply side price pressures easing, inflation is projected to stabilise well within the desired range of 4-6 per cent thereafter, supported by appropriate policy measures and well anchored inflation expectations. Amidst subdued demand conditions, core inflation is expected to revert to low levels from January 2020, mainly with the dissipation of the effect of the one-time large adjustment to house rentals in early 2019.
External sector remains resilient amidst global headwinds
Trade performance during the first eight months of 2019 recorded an improvement over the previous year, supported by a notable contraction in the growth of imports and a modest growth of exports. Tourist arrivals continued to improve, recovering gradually from the effects of the Easter Sunday attacks, while workers’ remittances moderated. Outflows of foreign investment in the Government securities market experienced in August 2019 have ceased thereafter, while the equity market recorded a modest net inflow so far during the year when both primary and secondary market transactions are considered. Although the Sri Lankan rupee depreciated against the US dollar in September partly driven by adverse speculation, this trend reversed in October with continued inflows to the foreign exchange market. The Sri Lankan rupee remains appreciated against the US dollar by 1.3 per cent thus far during the year, while gross official reserves are estimated at US dollars 7.6 billion by end September 2019, providing an import cover of 4.5 months. 3
Growth of monetary and credit aggregates continued to moderate
The year-on-year growth of credit extended to the private sector by licensed commercial banks continued to decelerate in August 2019, amidst subdued economic activity, weak investor sentiments, and elevated lending rates. In absolute terms, although credit extended to the private sector expanded during the month of August 2019 as well as during the first eight months of 2019, this expansion was far below the levels recorded in the corresponding period of 2018. Driven by the slowdown in the growth of private sector credit, the year-on-year growth of broad money (M2b) also decelerated during the first eight months of 2019. In view of the ongoing reduction in market lending rates and the expected revival of economic activity, credit expansion is expected to accelerate gradually in the period ahead, thus supporting economic activity further.
Faster reduction in lending rates is expected, responding to the measures already taken
The Central Bank took a number of policy, operational as well as regulatory measures during the past twelve months to ease monetary policy and monetary conditions. Deposit interest rates have declined notably with the imposition of caps on deposit rates of financial institutions in April 2019.