Sri Lanka policy rates unchanged, but tight stance promised

Jan 17, 2007 (LBO) — Sri Lanka’s central bank kept its main discount rate to banks unchanged at 12.00 percent but promised tight monetary policy ahead based on a quantity targeting framework unveiled earlier in January. “The targeted growth in reserve money, which will be maintained on a daily average basis, will ensure strict maintenance of the targets,” the Central Bank said in its January monetary policy statement.

Stop Gap Strategy

Instead of using policy rates as the primary monetary tool, Sri Lanka’s central bank now uses a complex mixture of discount window restrictions and reserve money targets.

It has two discount window rates of 12.00 and 19.00 percent with restricted access.

In the last two months of 2008 it also drew praise from critics for avoiding printing money for the government by intervening in Treasury bill markets, which has been blamed as a key cause of inflation in the country.

However due to a flaw in the country’s monetary law it is obliged to print money and give ‘provisional advances’ to the government up to 10 percent of planned revenue, a move which usually happens at the beginning of the year.

For 2008, reserve money growth has been set at 15 percent.