Central bank holds Sri Lanka policy rates steady in August

August 16 (LBO) – Sri Lanka’s central bank said Wednesday it was holding rates steady, but warned that fuel subsidies were putting pressure on the balance of payments. The rate setting monetary board had decided not to raise policy interest rates but rely on open market operations to slow money supply growth, the central bank’s August monetary policy statement said.

After a 12.5 basis point hike in July following 25 basis point rise earlier, Sri Lanka’s reverse repo rate at which the central bank lends money to the banking system is now at 10.625 percent and the repo rate at which funds are drained is at 9.125 per cent.

The earlier tightening was prompted by rocketing consumer inflation which peaked in June at 17.7 percent.

The high increases in consumer prices arising from past high monetary growth moderated somewhat in July 2006 responding to tight monetary policy measures, the central bank said.

Inflation, measured as the point-to-point change in the Colombo Consumers’ Price Index, declined from 17.7 per cent in June 2006 to 14.7 per cent in July 2006, and is expected to moderate further.

Economists complain that unchecked gov