Sri Lanka keeps policy rates unchanged, says credit slowing

Sept 18, 2012 (LBO) – Sri Lanka’s Central Bank kept its key policy rate at which money is injected to the economy at 9.75 percent saying credit was slowing and balance of payments pressure and inflation was easing. The central bank said average monthly bank credit volumes had fallen to about 27 billion rupees from April to July compared to 52 billion rupees in the first quarter of 2012.

The central bank said credit volumes were now good enough to keep the economy ticking with the economy estimated to have grown 7.2 percent in the first half of 2012.

Analysts have pointed out that loan growth sky rocketed from the third quarter of 2011 because the monetary authority injected large volumes of central bank credit (printed money) in to the banking system to sterilize or offset liquidity shortages stemming from foreign exchange sales.

The injected money pushed credit volumes above the money raised by banks through deposits and loan repayments, with the resulting demand generating what is commonly known as a ‘balance of payments crisis’.

The rupee was gradually floated from February 2012 and sterilized foreign exchange sales ended. The rupee has since failed to appreciate significantly due to unsteri