Sri Lanka private sector credit turns corner in Sept

Dec 02, 2009 (LBO) - Sri Lanka's private sector credit started expanding in September 2009 ending eight months of contraction and the Central Bank says it would like to see more credit growth before tightening monetary policy.

Growing private sector credit demand could also push risk free yields up as the risk appetite of banks increase.

"That is also one of the reasons," Cabraal said.

The general feeling is that there will be more demand.

"But the increase (in risk free rates) is not warranted and it may not be sustained.

It may once again stabilize."

Cabraal says perceptions of recent fiscal loosening should be viewed in a backdrop of greater fiscal space generally available to the government after the end of a 30-year war.

"Some of the savings that is generated from lower interest rates and defence spending will give some breathing space," Cabraal says.

"Even if you see some spending you should not get too uncomfortable."

He says tax revenues in December should show further growth with imports picking up.

Rising Inflationary Fears

Inflation in the 12 months to October accelerated to 2.8 percent from a year earlier and prices rose 0.

8 percent in the month, the highest monthly rise