Sri Lanka signal rate up

Nov 25, 2011 (LBO) – An effective signal interest rate in Sri Lanka has edged up over 30 basis points over the week with the monetary authority withdrawing excess liquidity through a cash auction a higher rate. The 3-month auction Treasury bill rate which is controlled by the monetary authority increased 44 basis points to 7.95 percent, the 6-month yield increase 64 basis points to 8.18 percent and the 12-month yield increased 91 basis points to 8.50 percent.

On Thursday the Central Bank withdrew excess cash from the banking system at 7.44 percent up from 7.09 percent Wednesday.

Sri Lanka has a floor 7.00 repo standing facility to withdraw excess liquidity and 8.50 percent reverse repo window to inject liquidity but the monetary authority play within the corridor using cash auctions.

This week for the first time the Central Bank injected overnight cash into the banking system at 8.50 percent, effectively setting a narrower policy rate corridor of 7.44 percent to 8.50 percent.

On Friday gilt backed overnight cash traded around 8.35 percent and call money rose to 9.50 percent before easing, dealers said.

Sri Lanka has been defending a dollar peg which is draining liquidity from the banking system over the last several months.

Analysts have said that Sri Lanka needs higher interest rates to reduce credit growth and maintain a peg with the US dollar.

Risk free rates further along the yield curve have also rose this week.