Sri Lanka cuts policy rates, amid lower deficit

Jan 11, 2010 (LBO) – Sri Lanka’s central bank cut its policy rate at which excess cash is drained from the market 25 basis points to 7.0 percent, while inflation hovered at 6.9 percent in December. The government has also cut taxes on some foods, the central bank said. Earlier this month the military said it will begin vegetable distribution.

The Central Bank said the price rises were “transient” and did not indicate any “significant demand pressures in the economy”.

In the past the Central bank has generated high levels of inflation by printing money to finance runway budget deficits without allowing interest rates to rise sufficiently.

Sri Lanka’s high inflation and currency depreciation started with the creation of a money printing central bank in 1950 abolishing an earlier currency board arrangement that kept the economy stable and inflation linked to that of the Sterling pound.

The central bank said the budget deficit for 2010 was expected to have been 8.0 percent of gross domestic product, and the government is committed to keeping the deficit at 6.8 percent of GDP in 2011.

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