Sri Lanka switches to strong quantity targeting regime; policy rates unchanged in March

March 16 (LBO) – Sri Lanka’s central bank kept its now largely irrelevant discount rate unchanged Friday, while its monetary policy actions in recent weeks showed a firm reliance on quantity targeting. The release of the next regular statement on monetary policy is scheduled for 11 April 2007.

Update 2 (graphics/reserve money targets) Though the main discount rate (the reverse repo rate) now stands at 12 percent, daily open market operations through auctions have been discontinued and banks can only go to the discount window six times a month.

Quantity Targets

The central bank dropped all pretences of operating a rate targeting framework this week, by allowing overnight rates to shoot to a 12-year high and refusing to inject cash to the market through reverse repo auctions.

The monetary authority calmly waited on the sidelines as overnight call rates shot to above 35 percent, breaking a 7-year record established in late 2000, giving a strong signal to the market that it was no longer operating a rate targeting framework.

“The growth in monetary aggregates has been decelerating due to the