Sri Lanka’s central bank leaves policy rates unchanged

August 07, 2012 (LBO) – Sri Lanka’s Central Bank Tuesday left its trend setting short-term rates unchanged for the fourth straight month as monetary authorities move to cool inflation. The bank said its benchmark reverse repurchase rate, used to manage liquidity and contain inflation, stays at 9.75 percent.

The short-term repurchase rate, at which it lends to commercial banks, remains at 7.75 percent, the bank said following its monetary policy meeting late Monday.

Rising inflation has widened the negative real gap between interest rates and inflation and the bank says high consumer prices are largely due to drought-related supply shortages.

The Colombo Consumers Price Index accelerated to a 15-month high of 9.8 percent in July from a year earlier, as prevailing dry weather hurt food crops, according to official statistics.

However, the government’s move to reduce taxes on selected imported foods and a recent price reduction in domestic cooking gas could cool down inflation in the short-term, the Colombo-based bank said.

“Tight monetary conditions that are in place would suppress demand side inflationary pressures, thereby helping to maintain inflation at the targeted level in the medium term,” the bank said.

The central bank has raised policy rates twice since February to curb credit demand and allow the exchange rate to be more flexible to side-step a balance of payment crisis.

While the rupee has lost over 16 percent of its value against the US dollar since November, the central bank forecasts economic growth will slowdown to 7.2 percent this year.