Rate hike not ruled out if credit continues to accelerate: CB
Despite inflation remaining at benign levels, Sri Lanka will have to jack up interest rates if credit growth continues to grow at a faster pace, Central Bank (CB) Governor Arjuna Mahendran said.
“I don’t rule out a rate hike if credit growth continues to grow faster,” Governor Mahendran told a news conference yesterday.
Sri Lanka kept policy rates unchanged at historic lows at last Friday’s monetary policy review for the fifth consecutive month despite private credit growing a significant 21 percent.
“Now I think private credit is faster approaching levels where we don’t want to see much more growth. By the end of the year—after Christmas is over—we have to stabilize things,” Mahendran said.
The Central Bank last week put breaks on vehicle imports by directing financial institutions to impose a 70 percent upper cap in respect of l oans granted for the purpose of purchase of motor vehicles.
Central Bank Deputy Governor Nandalal Weerasinghe said t his was a prudential measure taken by the Central Bank to avoid a similar unpleasant situation faced by the Sri Lanka’s finance sector in 2013, which had massive exposure to gold-backed loans when the gold prices fell.
The Governor Mahendran also noted that it wouldn’t be easy for the Central Bank to hike rates as a lot big businesses in the country had borrowed extensively to expand their operations, making use of the low interest rate regime.
“A lot of our companies are highly leveraged. So we can’t raise rates easily because that will have a knock on effect on the economy,” he said.
Though he did not directly admit it, Governor Mahendran hinted that Sri Lanka’s monetary policy direction would largely be determined by the United States Federal Reserve’s decision to hike rates as in the case of most of the emerging and frontier markets.
Meanwhile, the Governor said the country’s economy is estimated to have grown at 6.7 percent in the second quarter of the year and asserted that this growth is “real and sustainable”.