Sri Lanka policy rates frozen amid debt monetization, inflation

Feb 16, 2010 (LBO) – Sri Lanka has held policy rates steady in February as inflation accelerated, the budget deficit expanded and excess bank reserves were created through a ‘quantity easing’ exercise as debt was monetized. Central Bank said it was holding its main ‘reverse repo’ policy rate through which money is being injected to the economy at 9.75 percent and the repo rate at which money is drained, at 7.50 percent.

Inflation accelerated to 6.5 percent in January from 4.8 percent in February and has been rising by about one percentage point over the past three months.

The Central Bank said in its February monetary policy statement that its “current policy stance will be maintained to facilitate the recovery in domestic economic activity, which is underway.”

“Credit obtained by the private sector, which was negatively impacted by the slowdown in economic activity domestically as well as globally has been increasing in nominal terms towards the end of the year 2009,” the Central Bank

Official projections for economic growth in the last quarter of 2009, was around 5.0 percent indicating that monetary policy could now be tightened.

There have been warnings that the policy rates are now irrelevant a