Comfort Zone

The Central Bank left its key short-term rates unchanged on Thursday, a sign that it was business as usual despite a snap poll and a hike in the domestic borrowing programme.
The overnight repurchase rate (repo rate) was kept at 7.00 percent and the reverse repurchase rate (reverse repo) at 8.50 percent, the bank said in a statement following its monthly Monetary Policy Meeting late Thursday. rn

rnMarket players are not expecting the bank to tinker with the short-term rates, though the Finance Minister recently announced that the government-borrowing programme would shoot up by Rs. 22 bn to Rs. 87 bn this year.rn

rnAfter nearly two-years of tough fiscal management, the Treasury is short of cash, as it is called up to subsidise key imports like wheat flour, milk food, petroleum and gas. The government has also bowed down to Union pressures to keep the Health and Transport sector alive, through pay hikes and postponing the latters privatisation. rn

rnThe bank has also maintained that the countrys economic fundamentals are strong and inflation was coming down, considering the current political impasse. rn

rnThe bank has maintained its soft interest bias since the political crisis blew up on 4/11 and has met market players many times, to assure them that there would not be a change in its policy of lowering interest rates.rn

rnSince cutting interest rates by 150 basis points last October, the Central Bank has not tinkered with the rates. rn

rnThree-month Treasury Bills are around 7.70 percent, a level last seen in the mid-seventies.rn

rnThe reverse repo-rate is the rate at which primary dealers in treasury bills and commercial banks can obtain overnight funds from the Central Bank by pledging their treasury bill/bond holdings as collateral. rn

rnThe repo-rate is the key benchmark, which sets the floor in the overnight call money market, as it enables lenders to invest excess funds in treasury bills and bonds held by the Central Bank (i.e. at near zero risk). rn

rnIt is also the Central Banks main instrument of signalling the expected direction of overall interest rates to the market.rn

rnThe next monetary policy review is scheduled for Friday April 16.rn

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-LBO Newsdesk: LBOEmail@vanguardlanka.comrn