review of the monetary policy stance

Economic Research DepartmentCentral Bank of Sri Lanka

Review of the Monetary Policy Stance

January 2021


Monetary Policy Press Conference19 January 2021


2

Decision: The Central Bank of Sri Lanka continues its accommodative Monetary Policy Stance…

Standing Deposit Facility Rate (SDFR) 4.50%

Standing Lending Facility Rate (SLFR) 5.50%

Bank Rate 8.50%

Statutory Reserve Ratio (SRR) 2.00%

Policy interest rates remain unchanged

Priority sector lending targets for micro, small and medium sector enterprises (MSMEs)

to be introduced, in consultation with the banking community.


Source: WHOSource: IMF WEO Oct 2020

The second wave of the COVID-19 pandemic adversely affected the recovery in global economic activity…

3

Global Spread of COVID-19 Growth Projections for 2020

Global Sri Lanka

Cases 95,517,587 53,750

Deaths 2,039,056 270Source: JHU

(19-01-2021: 06.51 am)Source: HPB

(19-01-2021: 06.33 am)


3.5

8.0 8.4 9.1

3.45.0 5.0 4.5 3.6 3.3 2.3

-1.7

-16.3

1.5

6.0

-30

-25

-20

-15

-10

-5

0

5

10

15

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Q1 Q2 Q3

2021(proj.)

%

Real GDP Growth (YoY)

The COVID-19 pandemic has weighed down Sri Lanka’s growth prospects…4

2020

Annual Growth for 2020

-3.9 (Proj.)


6,108.5

4,248.0

7,922.7

Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21

ASPI - CSE

Positive sentiments continue…5

PMI Manufacturing

61.2

PMI Services

55.6

50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2020

Secondary Market Yields on International Sovereign Bonds


Given subdued levels of inflation, the Central Bank has conducted monetary policy with a focus on supporting economic recovery…Jan

Policy Rates

50 bpsSRR

100 bps

Mar Apr May Jun Jul Aug Nov

Policy Rates

25 bps Policy Rates

25 bpsPolicy Rates

50 bps

SRR

200 bps

Policy Rates

100 bps

Targeted measures to

reduce specific

excessive interest rates

Maximum interest rates on mortgage-

backed housing loans

6

Jan

Priority sector

lending targets to

MSMEs to be introduced

• The Central Bank reduced policy interest rates five times by a total of 250 bps in 2020 in addition to 100 bps in 2019

• SRR was reduced by 300 bps in two occasions in 2020, in addition to 100 bps in 2019

• Bank Rate was also reduced by 650 bps during 2020


Reflecting the transmission of monetary policy easing measures, market interest rates continued to decline notably during 2020 and most were at single digit levels…

The continuation of a single digit interest rate structure would enable the economy to reap benefits of maintaining inflation at single digits for more than a decade…

7

Adjustments in Interest Rates

Interest RateLatest

AvailableFrom end 2019

to Latest

% bps Change

AWCMR 4.55 -290

91-day T-bill 4.70 -281

182-day T-bill 4.78 -324

364-day T-bill 5.02 -343

Weekly AWPR 5.88 -386

Monthly AWPR 5.74 -426

AWLR 10.55 -304

AWNLR 8.71 -409

AWDR 5.80 -240

AWFDR 7.14 -291

AWNDR 4.96 -393

AWNFDR 5.07 -410

10.00

13.59

10.55

12.80

8.718.20

5.745.80

10.05

7.14

8.89

4.964

6

8

10

12

14

16

Jan

-15

Jun

-15

No

v-15

Ap

r-16

Se

p-1

6

Feb

-17

Jul-1

7

De

c-17

May

-18

Oct

-18

Mar

-19

Au

g-1

9

Jan

-20

Jun

-20

No

v-20

%

Movement of Selected Market Interest Rates

AWPR(Monthly) AWLR AWNLR AWDR AWFDR AWNDR


Driven by domestic credit, money supply growth accelerated during the latter part of 2020…

8

7.0

22.3

0

5

10

15

20

25

30

Jan

-08

De

c-0

8

No

v-0

9

Oct

-10

Se

p-1

1

Au

g-1

2

Jul-1

3

Jun

-14

May

-15

Ap

r-16

Mar

-17

Feb

-18

Jan

-19

De

c-19

No

v-20

%

Year-on-year Growth of Broad Money (M2b)

-200

0

200

400

600

800

1,000

Jan

-19

Mar

-19

May

-19

Jul-1

9

Se

p-1

9

No

v-19

Jan

-20

Mar

-20

May

-20

Jul-2

0

Se

p-2

0

No

v-20

Jan

-21

Rs.

bn

Overnight Money Market Liquidity & CBSL Holdings of Government Securities

CBSL Holdings of Government Securities

Overnight Liquidity

En

d 2

019


9

Supported by the policy easing measures adopted by the Central Bank in 2020, credit extended to the private sector started to pickup gradually…

58.9

0.8

25.2

120.1

13.4

-69.6-54.1

-3.6

78.387.4

59.2

41.4

4.3 6.2

-10

-5

0

5

10

-80

-50

-20

10

40

70

100

130

De

c-19

Feb

-20

Ap

r-20

Jun

-20

Au

g-2

0

Oct

-20

%

Rs.

bn

Monthly Change in Outstanding Credit to the Private Sector by Commercial Banks

Monthly change in credit (Absolute terms)

Growth of credit (y-o-y) (RHS)

297

515

353

176224

691

755

617

762

230

299

0

200

400

600

800

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Jan

- N

ov

2020

Rs.

bn

Annual Increase in Outstanding Credit by Commercial Banks to the Private Sector


Average rates on SME loans broadly follow the trends of overall average rates…10

8.71

10.55

9.07

11.18

8

9

10

11

12

13

Jul-2020 Aug-2020 Sep-2020 Oct-2020 Nov-2020

%

AWNSR(a) & AWSR(b) [All Licensed Banks]

AWNLR AWLR AWNSR AWSR

(a) Average Weighted New SME Loan Rate, (b) Average Weighted SME Loan Rate

The rates on small new loans to SMEs have declined, despite being relatively higher than large loans…

9.69

10.48

9.57

8.57

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

Jul-2020 Aug-2020 Sep-2020 Oct-2020 Nov-2020

%

Loan size-wise AWNSR

Rs. 100,000 or below Above Rs. 100,000 up to Rs. 1 mn

Above Rs. 1 mn up to Rs. 10 mn More than Rs. 10 mn


Trade deficit narrowed in 2020 with import expenditure declining by a higher amount than the decline in earnings from exports, while worker’s remittances increased steadily recording the highest ever monthly inflow in December 2020…

11

-730

-574 -54

9

-84

0

-40

7

-16

1

-20

9

-34

2

-525

-514

-56

4

-1000

-800

-600

-400

-200

0


US

D m

n

2019 2020

Trade deficit (y-o-y) Workers’ remittances

2020 (Jan – Nov): USD 5.4 bn 2019 (Jan – Nov): USD 7.2 bn

581

527

49

2

375 4

32

572

702

66

4 703

631

612

813

0

300

600

900


US

D m

n

2019 2020

2020 : USD 7.1 bn (5.8%, y-o-y)2019 : USD 6.7 bn (-4.3%, y-o-y)


The Sri Lankan rupee experienced some notable pressure recently…12

Movement of Sri Lankan Rupee against the USD (up to 19 January 2021)

• Gross official reserves were estimated at USD 5.7 bn at end 2020, compared to USD 7.6 bn at end 2019

• Central Bank net purchases in 2020 was USD 282.5 mn

170

175

180

185

190

195

200

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-20

Dec

-20

Jan

-21

Rs/

USD

193.645819 Jan 2021

LKR Movement Against Other Currencies

2019 2020up to 19 Jan

2021

CurrencyApp(+)/Dep

(-)

App(+)/Dep

(-)App(+)/Dep(-)

US dollar 0.6 -2.6 % -3.7 %Pound

sterling-2.8 -6.2 % -3.5 %

Euro 2.6 -11.2 % -2.1 %Japanese

yen-1.0 -7.5 % -3.0 %

Indian rupee 2.6 0.0 % -3.8 %


Inflation to remain at desired levels… 13

As the economy is performing below its potential, demand driven inflationary pressures are not expected in the near term

• CCPI based food inflation decelerated

to 9.2% (y-o-y) in December 2020

compared to 10.3% in November 2020

• CCPI based non-food inflation

accelerated to 2.0% (y-o-y) in December

2020 from 1.6% in November 2020

• NCPI based food inflation decelerated

to 9.4% (y-o-y) in November 2020

compared to 10.6% in October 2020

• NCPI based non-food inflation

accelerated to 1.7% (y-o-y) in November

2020 from 1.5% in October 2020

6.2 5.2

8.6 9.4

4.21.7

-10-6-226

101418

Mar

-17

Jul-1

7

No

v-17

Mar

-18

Jul-1

8

No

v-18

Mar

-19

Jul-1

9

No

v-19

Mar

-20

Jul-2

0

No

v-20

%

Headline Inflation - Food and Non Food NCPI (Base: 2013=100)

All Items Inflation Food Inflation Non Food Inflation

4.8 4.2

6.3

9.2

4.32.0

-4

0

4

8

12

16M

ar-1

7

Jun

-17

Se

p-1

7

De

c-17

Mar

-18

Jun

-18

Se

p-1

8

De

c-18

Mar

-19

Jun

-19

Se

p-1

9

De

c-19

Mar

-20

Jun

-20

Se

p-2

0

De

c-20

%

Headline Inflation - Food and Non Food CCPI (Base: 2013=100)

All Items Inflation Food Inflation Non Food Inflation


14

Inflation will be maintained within the 4-6% desired range…

Note: A forecast is neither a promise nor a commitment

The fan chart illustrates the uncertainty

surrounding the baseline projection

path using confidence bands of

gradually fading colours. The projection

reflects the available data and

assumptions and judgments made at

the January 2021 forecast round.

The confidence intervals (CI) shown on

the chart indicate the ranges of values

within which inflation may fluctuate

over the medium term. Specially, the

thick green shaded area represents 50%

confidence interval, implying there is a

50% probability that the actual inflation

outcome will be within this interval. The

confidence bands show the increasing

uncertainty in forecasting inflation over

a longer horizon.


15

Monetary Policy Announcements in 2021

19 January, Tuesday1 08 July, Thursday504 March, Thursday2 19 August, Thursday608 April, Thursday3 14 October, Thursday720 May, Thursday4 25 November, Thursday8


Thank You

16

review of the monetary policy stance

Documents