Sri Lanka policy rates kept flat, external sector to be watched

Aug 16, 2013 (LBO)- Sri Lanka has kept policy rates steady in August with inflation moderate but the external sector will be watched closely amid currency turmoil in trading partners, the Central Bank said. “Such inflows display that the foreign investor confidence on Sri Lanka has remained unchanged despite the volatility caused by global markets reacting to the prospects of the tapering of quantitative easing by advanced economies,” the Central Bank said.

Inflows in the capital account however trigger imports as the money is invested and or consumed and economic activity picks up. FDI inflows in particular require capital imports.

Imports had increased in June, partly due to the import of some one-off items, the Central Bank said. Meanwhile remittance inflows have been strong. Remittances (exports of labour), also trigger imports and is a key cause of Sri Lanka’s trade deficit.

A stronger import performance can be a sign of higher economic activity, and in the absence of any central bank accommodation (printing money) it is not a danger to the exchange rate or foreign reserves.

Update IV/wrap The Central Bank said inflation fell to 6.1 percent in July from 6.8 percent in June a