The central bank in it January monetary policy statement said broad money grew (M2b) grew 20.6 percent in November, though market rates moved up over the past few months.

Rates moved up due to liquidity shortages coming from the defence of a dollar peg.

Sales of dollars by the Central Bank results in an equivalent reduction in rupee liquidity, and to keep rates from spiking immediately the Central Bank injects fresh liquidity by printing money to 'sterilize the interventions."

Despite the sterilizations one year Treasury bill yields rose 175 basis points, the average weighted prime lending rate (AWPR) increased by around 120 basis points in 2011 and the average weighted deposit rate (AWDR) rose 100 basis points, the Central Bank said.

Analysts say higher deposit rates will help reduce aggregate consumption and provide deposits to finance credit growth. Higher lending rates can also reduce credit growth, allowing the monetary system to rebalance.

But credit to business by November was up 33.5 percent from a year earlier, the Central Bank said. In October credit growth was up 33.4 percent.

If liquidity injections are 100 percent, rates can be held but reserve losses could increase, analysts. The Central Bank said Treasury bill auction rates were steady for two weeks running.

By December 2011, Sri Lanka's forex reserves have fallen to 6.0 billion US dollars from a 8.0 billion dollar high amid sterilized interventions.

The central bank said in 2012 tourism earnings is expected to be 1.2 billion US dollars, migrant worker remittances would be 6.5 billion US dollars and foreign direct investments would increase to 2.0 billion US dollars.

The inflows will increase the spending power of the domestic economy, boost economic activity (growth) driving imports and the trade deficit.

Updated