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At
the rate inflation and connected macro economic issues
get out of hand, banking circles are buzz with what
could be a thorny poser to regulators is could Central
Bank monetary policy get any tighter?
Last week following the July monetary policy review,
the Central Bank according to analysts perhaps exposed
it was running out of steam.
In its own words, the Central Bank said: “In view
of the increase in the average core inflation, and the
likelihood of its further increase due to second round
impacts of the increases in prices of non core items
and the need for stemming the demand pressures to contain
inflation, the Central Bank has decided to further tighten
its monetary policy stance by restraining the expansion
in reserve money.”
Accordingly, the Bank has revised downwards its reserve
money targets for the third quarter of the year over
and above the already tightened reserve money targets
announced in April 2008.
With this revision, the targeted rate of expansion in
the annual average of reserve money has been lowered
from 12.50 per cent to 11.75 per cent.
Inflation, which reached higher than expected levels
worldwide on account of unprecedented high crude oil
prices and increased food prices, has remained above
desired levels throughout 2008 in Sri Lanka as well.
As measured by the Colombo Consumers’ Price Index
(CCPI), average inflation reached 21.0 per cent in June,
increasing from 19.8 per cent recorded during May 2008.
The increase in June was expected as the full impact
of the fuel price adjustment that occurred at end May
and the entailing transport fare hikes was felt during
the month of June. The average core inflation measure,
which is compiled by excluding food and energy items
from the CCPI also increased sharply to 8.4 per cent
in June 2008 from 7.9 per cent in May 2008. This increase
the Bank said was largely due to the full impact of
the one-off increase in transport charges such as train
and bus fares, three-wheeler fares and school van fees,
consequent to the fuel price increase in late May.
However the Central Bank said the Monetary Board has
also satisfactorily noted that the tight monetary policy
stance adopted in the recent past has resulted in the
effective deceleration of the growth in domestic credit
aggregates and broad money.
As proof, the Bank revealed that credit to the private
sector, which was as high as 26 per cent in April -
May 2007, has decelerated to 13.1 per cent by end May
2008.
Overall credit to the public sector, which includes
credit extended to the government and public corporations,
also declined by end May compared with the levels at
end 2007 largely on account of the decline in credit
utilised by the public corporations.
“Benefiting from these developments, expansion
in the broad money supply decelerated from 22 per cent
in August 2007 to 15 per cent in April 2008 and to 13.1
per cent by end May 2008,” the Bank said.
“The favourable impact of the deceleration in monetary
expansion on inflation will be observed with the tapering
off of the impact of one time increases in price levels,”
it added.
The release of the next regular statement on monetary
policy will be on 20 August 2008.
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