Sri Lanka Central Bank shows first signs of ending loose monetary policy

November 30 (LBO) – Sri Lanka’s Central Bank showed the first signs of ending its loose monetary policy after shunting the country into a balance of payments crisis and driving consumer inflation to 19.8 percent in November, as credit to government from the monetary authority climbed towards a billion dollars. In an unusual move, the Central Bank’s Economic Research Department, which for months fuelled inflationary expectations among the public by giving multiple reasons why interest rates should not be raised, (with the latest being that core inflation was going down) gave a definite warning Thursday that interest rates would be raised in the future.

Definite Warning

“The impact of volatile vegetable prices in November 2006 and other administered prices on inflation is about 7 per cent, leaving a core inflation of about 12 per cent,” the Economic Research Department said.

“However, the core inflation is also high requiring continued tightening of demand management policies including further tightening of monetary policy and rationalisation of fiscal expenditure and tariff. Although the impact of volatile prices may prevail into the next few months, the core inflation is expected to respond favourably in the future to the further tightening of monetary policy.”

According to data rel