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Sri Lanka rates unchanged; private credit as envisaged: CB Governor
23 Oct, 2012 07:54:19
Oct 23, 2012 (LBO) - Sri Lanka has kept its key policy rate at which money is injected in to the banking system unchanged at 9.75 percent and private sector credit was slowing as expected, Central Bank Governor Nivard Cabraal said.
The Central Bank said credit to private business was only 14 billion rupees in August compared to an average of 51 billion rupees in the first quarter of 2012 but broad money was still growing.

"Despite the slowdown of credit to the private sector, broad money growth in August was higher than the previous month, reflecting higher public sector borrowing," the Central Bank said.

Governor Cabraal said private sector credit was moving as envisaged.

Sri Lanka's rupee fell as much as 134 rupees to the US dollar by the third quarter of 2012 from 110 rupees a year earlier, amid sterilized foreign exchange sales driving inflation above 9 percent, but has since moved to 128/129 levels.

Sri Lanka's inflation has fallen for two months in a row to 9.1 percent in September.

"The tight monetary policy stance is expected to prevent second round effects of supply side factors entrenching into future inflation, and thereby help maintain inflation at mid-single digit levels over the medium term," the monetary authority said.

Analysts say past experience has shown that inflation tends to spike immediately after the currency falls after a balance of payments crisis, and then ease due to the tightening effects of less than 100 percent sterilization of foreign exchange sales and subsequent slower credit.

The currency can also strengthen and reserves can be built up if the state also reduces excessive spending.

In the past few week the Central Bank has injected one month money through a term auction in to the banking system, which has raised concerns among analysts, who have warned that it may weaken the rupee peg.

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