Aug 08, 2008 (LBO) – Sri Lanka’s central bank has said interest rates on benchmark government securities had begun to ease with the opening up of the market to foreign investors, continued liquidity and lower inflation expectations.
“In line with the rate reduction in the primary market, the secondary market yield curve that represents the interest rate structure in the market, showed a downward shift during 2008,” the statement also said.
“The reduction of the interest rates in the secondary market is in the range of 130-440 basis points.”
However other economic analysts have shown that a steep rise of rates in the first quarter of 2008 was partly consequence of running soft-pegged exchange rate based monetary regime where foreign assets were sterilized by the monetary authority.
Sterilizing foreign flows coming through the peg, and the build-up of reserves without a similar expansion of local money supply, takes capital out of the economy and causes a cash crunch.
The cash ends up in the US budget deficit when foreign reserves are invested abroad, and effectively ‘crowds out’ the local economy.
However analysts say it was a consequence of the central persuing very tight monetary targets in a bid to ar