Monetary Law and Monetary Policy 4. Monetary policy – instruments and policies
Review of the Monetary Policy Stance
Transcript of Review of the Monetary Policy Stance
Economic Research DepartmentCentral Bank of Sri Lanka
Review of the Monetary Policy Stance
January 2021
Economic Research DepartmentCentral Bank of Sri Lanka
Monetary Policy Press Conference19 January 2021
Economic Research DepartmentCentral Bank of Sri Lanka
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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.
Economic Research DepartmentCentral Bank of Sri Lanka
Source: WHOSource: IMF WEO Oct 2020
The second wave of the COVID-19 pandemic adversely affected the recovery in global economic activity…
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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)
Economic Research DepartmentCentral Bank of Sri Lanka
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.)
Economic Research DepartmentCentral Bank of Sri Lanka
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
Economic Research DepartmentCentral Bank of Sri Lanka
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
Economic Research DepartmentCentral Bank of Sri Lanka
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…
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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
Economic Research DepartmentCentral Bank of Sri Lanka
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
Economic Research DepartmentCentral Bank of Sri Lanka
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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
Economic Research DepartmentCentral Bank of Sri Lanka
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
Economic Research DepartmentCentral Bank of Sri Lanka
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
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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)
Economic Research DepartmentCentral Bank of Sri Lanka
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 %
Economic Research DepartmentCentral Bank of Sri Lanka
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
Economic Research DepartmentCentral Bank of Sri Lanka
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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.
Economic Research DepartmentCentral Bank of Sri Lanka
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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
Economic Research DepartmentCentral Bank of Sri Lanka
Thank You
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