Sri Lanka hikes policy rate by 75bp to curb credit

Apr 05, 2012 (LBO) – Sri Lanka raised its key policy rate by 75 basis points to 9.75 percent to curb credit which was still growing at an “undesired rate”, and state borrowings were also high, the Central Bank said. Sri Lanka rupee came under pressure from high credit growth from the middle of 2011 and the Central Bank raised policy rates by 50 basis points in February and also asked banks to slow loans.

Despite the measures, “there are still some signs that credit growth is continuing at an undesired pace,” the central bank said.

Borrowings by the government were also high in the first two months of year, which has pushed up money supply growth.

“Towards such outcome, it is essential that the current shortfall in Government revenue is effectively addressed and public expenditure is further rationalised, so as to significantly lower the reliance on bank sources to finance the Government budget deficit,” the Central Bank said.

“Such a course of action would reverse the trend observed in the first quarter of 2012, and in that context, the recent upward revision of customs and excise duties on selected items by the Government is a display of its commitment to the necessary fiscal consolidation proce