Central
Bank ends last monetary policy review of 2007 with optimism
The Central Bank concluded its last monetary policy review for 2007
with optimism.
It
said the economy was estimated to have expanded by 7.0 per cent
during the third quarter of the year, subsequent to registering
a growth of 6.2 per cent during the first half. This expansion was
supported by the healthy performance in the Industry and Services
sectors and the recovery in the Agriculture sector. Output in the
Agriculture sector has been underpinned by higher production of
tea and rubber, benefiting from favourable weather conditions, as
well as continued high global demand.
Road map for 2008 today
The
Central Bank will announce the “Road Map for Monetary and Financial
Sector Policies for 2008 and beyond” today (January 2).
The advance release calendar of monetary policy announcements for
2008 will be published with the Road Map. Chief guest at the launch
will be Central Bank Governor Nivard Cabraal.
In the external sector, with the increase in the average price of
tea exports, agricultural exports strengthened further given higher
industrial and mineral exports. Accordingly, cumulative exports
during the first ten months increased by around 13 per cent. Cumulative
imports during the first ten months of 2007 increased modestly by
7.3 per cent over that of the corresponding period in 2006, helping
to narrow the resulting trade deficit for the period by 3.7 per
cent. Subsequently, the balance of payments was estimated to have
recorded a surplus of US dollars 696 million while the gross official
reserves stood at US dollars 3,226 million by end October 2007.
The
appreciation of the rupee vis-à-vis the US dollar following
the international bond issue was further upheld by expectations
of further inflows.
In order to contain the demand pressures in the economy, the Central
Bank set a tight growth path for reserve money, which is the appropriate
amount of new money to be injected by the Central Bank during the
year. The Central Bank has thus far been able to be within the respective
limits during the first three quarters of the year and is expected
to be within the fourth quarter limit as well. The containment of
reserve money in turn has succeeded in controlling the rapid expansion
in broad money as well.
Inflation, as measured by the point-to-point change in the New Colombo
Consumers’ Price Index - CCPI (N) was 19.3 per cent in November
while the annual average inflation was 15.4 per cent as at November
2007. The increases in prices of imported commodities such as milk
powder, wheat and petroleum contributed to more than 30 per cent
of the inflation during the second half of 2007.
The increase in broad money, which was around 20 per cent during
the first three quarters, declined to 17.5 per cent in October 2007,
largely due to the decline in domestic credit. Credit to the private
sector, which was in a higher range of 24-26 per cent during the
first half of the year, gradually decelerated to 22-23 per cent
during the second half in response to the tight monetary policy
stance aimed at curbing the high expansion in credit. Continuing
this downward trend, it further decelerated to 21 per cent during
October 2007. Also, Net Credit to the Government (NCG) from the
banking system declined substantially in October with the repayments
made by the government.
Meanwhile,
credit to public corporations, particularly to the Ceylon Petroleum
Corporation (CPC), indicated some decline in October while a further
decline is expected during 2008 with improvements to the cash flow
of the CPC due to receipt of the Iranian credit facility. The decline
in domestic credit would facilitate to reduce the growth in money
supply and hence the demand driven inflationary pressure.
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