Sri Lanka holds policy rates amid high inflation

Mar 08, 2011 (LBO) – Sri Lanka’s central bank said it is holding policy rates steady in despite inflation rising to 7.8 percent in the 12-months to February, one of the highest in Asia, as it expected food prices to fall in the next two months. Sri Lanka’s central bank also has one of the highest interest rates in Asia to drain excess money from the banking system at 7.0 percent and to print new money at 8.5 percent.

Amid capital inflows there has been excess liquidity in the banking system, making the repo rate at which money is drained, the effective policy rate since mid 2009.

The central bank said its March monetary policy statement that prices rose in recent weeks partly due to shortfalls of vegetables following recent floods but supplies would improve starting April.

Sri Lanka has limited control of monetary policy as it has a peg with the US dollar making it the de factor external anchor for inflation.

“Continuous increase in the prices of key international commodities, particularly that of crude oil, remains a concern,” the Central Bank said.

“The recent geo-political disturbances in some Middle-Eastern countries have pushed global crude oil prices over the levels previously projected by international agencies.