Sri Lanka 2009 end inflation to be 3.5-pct: CB Governor
Oct 29, 2009 (LBO) – Sri Lanka’s inflation would be 3.5 percent by end-2009 setting the stage for lower interest rates and higher growth as investor confidence in the economy was rising, Central Bank Governor Nivard Cabraal said.
“We are having inflation of one percent and we intend to keep it that way,” Cabraal told reporter Thursday.
“Inflation would be about 3.5 percent at the end of the year.”
Cabraal said the economy had stabilized, interest rates were falling foreign reserves were rising towards five billion US dollars and sovereign credit ratings were improving.
Sri Lanka is recovering from a 30-year war which ended in May and government spending has been kept in check with tax revenues falling.
A deal with the International Monetary Fund (IMF) which limits state spending and borrowings from domestic sources has raised confidence in the economy, generating strong foreign inflows to government securities markets.
The Central Bank has been steadily sterilized liquidity. Though excess liquidity in the market had been high credit growth in the banking sector has been negative, keeping inflationary pressures low.
Inflation in October 2009
The annual average inflation rate, as measured by the Colombo Consumer’s Price Index (CCPI) (2002=100), computed by the Department of Census and Statistics, continued to decelerate since November, 2008 and reached the five year low of 5.2 per cent, compared to 6.6 per cent in the previous month. At the same time, the core inflation, which measures the price movement of non-food and non-energy items of the CCPI basket, further dropped in October, 2009.
The CCPI increased marginally by 0.4 per cent over the previous month, with the Index moving upward to 209.4 from 208.6 in September, 2009. The rate of inflation, on a year on year basis, increased marginally to 1.4 per cent in October, 2009 from 0.7 per cent in September, 2009.
Meanwhile, the core inflation, on a point-to-point basis, decreased further to 5.1 per cent compared to 5.4 per cent in September, 2009 with the annual average rate also declining to 11.0 per cent from 12.1 per cent in the previous month.
Sri Lanka state banks in moves to cut loan rates
Oct 29, 2009 (LBO) – State banks were scrambling to give effect to an order to cut lending rates, but their balance sheets of state banks are likely to be hurt despite depositors taking some of the cost, officials said.
Sri Lanka’s president ordered banks to cut lending rates by 700 basis points to between 8.0 and 12.0 percent Tuesday, ahead of national polls early next year.
The National Savings Bank, perhaps Sri Lanka’s largest fixed rate mortage lender, would give fresh loans at the new rates and prices for loans already disbursed will be brought down as much as possible, chairman S R Attygalle said.
Bank of Ceylon chairman Gamini Wickremesinghe said tourism, agriculture, fisheries and housing loans would be given at 12.0 percent. Wickremesinghe said some loans for these sectors were already given at concessionary rates.
People’s Bank chairman W Karunajeewa said the bank was devising ways to give effect to the order.
“It is likely that the impact on the earnings of Peoples Bank will be greater than the Bank of Ceylon,” Fitch Sri Lanka chief Chanaka Wickremesuriya said.
“There is clearly likely to be a profitability impact on banks, over the short to medium term.”
Peoples’ Bank has a high proportion of pawning or gold backed loans.
Savings depositors in particular are likely to take the brunt of the burden of the decision.
“Banks are likely to immediately adjust savings deposits rates to partially compensate and progressively fixed deposit rates as and when they mature,” Wickremesuriya.
State banks, which are active in rural areas, have paid rates as low as 5.0 percent when inflation was running close to 29.0 percent in recent years.
Because state banks are the biggest they have market power.
The Central Bank had now brought inflation down close to 1.0 percent, allowing all citizens, to get loans at low rates if government deficit spending which pushed rates up in the first place can be controlled.
Low inflation also means, depositors will not lose, as long as rates are above inflation.
But interest rates are determined by future expected inflation, and if inflation picks up, savers will lose money as they did from 2004 to 2008, when the real rate, or the gap between inflation and interest rates, turned negative.
State commercial banks also lend at relatively high rates, because their costs are high due to over-staffing.
Due to weak inflation credibility and past mis-management of the economy, Sri Lanka’s inflation expectations are high, with demands for large salary increments being common as well as high interest rates being asked by savers and lenders.