May 11, 2012 (LBO) – Sri Lanka’s central bank kept its key policy rate unchanged at 9.75 percent saying monetary conditions are tightening and credit growth will moderate, eventually helping the exchange rate.
The March loan totals may include possible forex losses on dollar loans.
“With respect to monetary developments, market interest rates have moved up gradually, reflecting the tightening of monetary conditions,” the Central Bank said in its March monetary policy statement.
“Benchmark Treasury bill yield rates have increased and in turn, deposit and lending rates of commercial banks as well as other financial institutions have shown an increasing trend.”
Even if total loans do not fall as long as loans are matched by deposits, the exchange rate will not come under pressure as aggregate demand will not be change, but there will be shift from consumption to saving.
Though policy rates were only raised 125 basis points to 9.75 percent Treasury bill yields have topped 12 percent, a rise of around 500 basis points since August and dealers say money that fled the Treasuries markets to banks are now returning.
The Central Bank has also stopped buying Treasury bills to print mon