Feb 20, 2009 (LBO) – Falling inflation is giving Sri Lanka more room to loosen monetary policy, Central Bank Governor Nivard Cabraal said Friday, though the island is grappling with a balance of payments problem. Sri Lanka’s 12-month inflation would fall to around 8.0 percent in February from 10.7 percent in January and year-end inflation would be in single digits, “closer to 5.0 percent than 10.0 percent, Cabraal told reporters.
“We have room for less stringent monetary policy,” he said. “We will still keep to our reserve money targeting framework, but we would like to see interest rates fall.”
Cabraal cut the bank’s 19.00 percent de facto main policy rate, which sets the ceiling on Interbank rates, and which has unrestricted access, to 17.0 percent in January and again by 50 basis points to 16.50 on February 11.
A restricted 12.0 percent window which is now only opened when the banking system is short on a net basis was also cut to 11.75 in February.
Cabraal said he would like to see banks reducing deposit and lending rates by two percentage points to pass on the rates cuts to the economy.
Sri Lanka’s inflation has been falling amidst deflating commodity pri