Sri Lanka holds policy rates, says lending rates easing

Sept 17, 2013 (LBO) – Sri Lanka’s central bank kept its policy rate band at 7.0 and 9.0 percent saying lower pressure from the state budget deficit is expected to bring down lending rates further. “Continued fiscal consolidation efforts by the government and greater financial discipline of public corporations are expected to reduce the public sector’s reliance on banks, thereby passing the benefit of monetary easing to the private sector,” the Central Bank said in its September monetary policy statement.

Heavy deficit spending and unprecedented losses in state enterprises which were accommodated with central bank credit drove Sri Lanka into a balance of payments crisis in 2011/2012 and kept interest rates high even after emerging from it.

In July credit to private businesses had increased by 28.5 billion rupees while credit to the state has also grown. Sri Lanka’s broad money supply tracked by the Central Bank had risen 16.4 percent by July higher than the 15 percent target for 2013.

The Central Bank said inflation rose to 6.3 percent in August from 6.1 percent a month earlier but inflation pressures were muted with lower international prices also helping.

In times of weak cred