No Surprises

The Central Bank left its key short-term rates unchanged on Wednesday, signalling that the countrys economic fundamentals are sound, despite political uncertainty.
The overnight repurchase rate (repo rate) was kept at 7.0 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 Tuesday. rn

rnldblquote The stronger than expected recovery in some major trading partner economies, such as the U.S., could provide a stimulus for exports, while the overall recovery in the global economy could be expected to boost tourism,
dblquote the Central Bank said in a statement.rn

rnDespite the Central Banks easy rate bias, dealers were not expecting a change in monetary policy, as the upcoming parliamentary election has left the financial markets, especially the exchange rate, shaky.rn

rnBond dealers have stayed away from trading since Monday, after senior Central Bank officials urged market players to remain calm. rn

rnPresident Chandrika Kumaratunga weekend call for a snap poll, the third in four-years, has shaken the financial markets, triggering a sell off in the stock and foreign exchange markets.rn

rnHowever, some dealers said secondary government bond yields may nudge up when trading begins Wednesday “as a push for the economy during this period of uncertainty would be welcome.”rn

rnThe Central Bank said the economy is projected to grow by six percent this year.rn

rnBut some nagging areas, which include a prolonged drought, could adversely affect agricultural production and power supply, thereby putting upward pressure on prices.rn

rnStill, the bank is upbeat that an improved external sector would help boost the countrys official reserves and reduce pressure on the domestic exchange rate.rn

rnldblquote A sustained rise in private sector credit as witnessed in the last few months of 2003, as well as the speedy implementation of the donor financed public investment programme, would further enhance the growth prospects in the economy,
dblquote the bank said.rn

rnLast years private sector credit demand was largely aided by falling interest rates and an economic recovery. The public sector also reduced its liabilities to the banking system last year.rn

rnThe government hopes to cut its budget deficit to 6.8 percent of GDP in 2004. ldblquote This, however, would be contingent on the realisation of revenue targets and the meeting of any additional expenditure through budgetary cuts in non-priority areas,
dblquote the bank warned.rn

rnThe bank said the countrys reserves were on track as at end 2003, although it began to pick up above target due to unprecedented demand for currency during the festive season.rn

rnAt the start of the year, the foreign exchange markets saw a lot of volatility, reflecting negative market sentiments. rn

rnDuring the first three weeks of January, the rupee fell sharply by 1.5 percent against the US dollar, as against a 0.1 percent depreciation during the whole of 2003.rn

rnldblquote This trend has, however, since reversed with the rupee appreciating to Rs. 97.50 per US dollar at end January 2004, reflecting some adjustment in market sentiments.
dblquotern

rnThe next monetary policy review is scheduled for Friday March 12.rn

rn

-LBO Newsdesk: LBOEmail@vanguardlanka.comrn

rn