May 03, 2013 (LBO) – Sri Lanka has scope to ease policy, because credit growth is slowing and the Central Bank has been selling down its Treasuries stock, Governor Nivard Cabraal said. When its Treasuries are sold down, through a ‘quantity tightening’ policy can be tight, analysts say, regardless of the actual policy rate.
T-bill purchases can also trigger balance of payments crises and high inflation.
Mathai said the Central Bank’s flexible exchange rate policy from early 2012 had helped safeguard foreign reserves and should be continued.
Sri Lanka’s power hike may add about 1.0 or 1.5 percent to inflation Mathai said.
To keep the exchange rate stable in a floating environment, monetary policy has to be tight and all monetizing avoided through tight policy.
“Our view is that there is greater scope for easing than holding rates steady, particularly because the demand side is well under control,” Cabraal said.
If the inflation is easing that gives us the handle to ease monetary policy.”
Consumer inflation in Sri Lanka’s capital Colombo rose 6.4 percent in the year to April 2012 down from 7.5 percent in March.
The International Monetary Fund’s