Sri Lanka ‘comfortable’ with current rates, despite inflation, forex pressure

Mar 03, 2011 (LBO) – Sri Lanka is comfortable with current interest rates, Central Bank governor Nivard Cabraal said despite a spike in consumer prices to a two year high and an outflow of foreign reserves. Sri Lanka has some of the highest policy rates in the world at 7.00 percent to drain excess liquidity and 8.5 percent to inject liquidity. But in February inflation accelerated to 7.8 percent, above the lower end of the policy corridor.

Rate Corridor

“We are comfortable with the rates as it is,” Governor Cabraal said. “The increase (in inflation) is almost entirely due to supply side shocks.

“We need not have an intervention from interest rate or monetary policy angle. That has to be dealt with in the supply angle.”

Authorities say recent inflation has not been due to monetary reasons or ‘demand pressure’ but mostly due to supply disruptions from floods.

However in February the Central Bank has been a net seller in foreign exchange markets, with excess liquidity in money markets falling from over 120 billion rupees to around 84 billion rupees the equivalent of about 300 million US dollars.

The trend indicates at least 300 million dollars of domestic demand hitting