Jan 22, 2014 (LBO) – Sri Lanka’s policy rates will probably be kept at current levels for the next three to six months, a media report said as inflation remained subdued compared to earlier levels. “There may be some other adjustments that we may need to make in the economy as we move on, but from the rates point of view, it seems appropriate in the current circumstances,” Cabraal was quoted as saying by Bloomberg newswires.
“As it is now, there doesn’t seem to be a need for any change, but if we do see any changes, we will be quick to react.”
As Sri Lanka intervenes heavily in forex markets, bank rupee reserves (liquidity) can be generated and or withdrawn by purchases and sales in foreign exchange, making policy rates irrelevant to overall monetary policy.
Sri Lanka is recovering from a balance of payments crisis triggered in 2011/2012 largely by energy utilities that borrowed heavily from state banks to cover losses while importing fuel with he borrowed money.
The monetary authority then engaged in sterilized foreign exchange sales (injecting rupees and selling dollars at the same time) in a failed bid to keep interest rates and exchange rates fixed simultaneously, triggerin