Sri Lanka’s Central Bank cuts government securities to curb inflation

Sri Lanka’s central bank has reduced its holdings of government securities since the end of last year to reduce excess liquidity as part of efforts to curb inflation, a senior official said Monday. Sri Lanka’s central bank has reduced its holdings of government securities since the end of last year to reduce excess liquidity as part of efforts to curb inflation, a senior official said Monday. The Central Bank has reduced its stock of treasury bills to Rs. 60.3 billion from Rs. 74 billion at the end of last year by allowing the market to buy the bills at auctions, D.S. Wijesinghe, the director of the bank’s domestic operations, said. “There will be further auctions of treasury bills to reduce excess liquidity.”

An auction for Rs. 3 billion worth of 36-day treasury bills will be held Tuesday, he said.

The central bank fears that excess money market liquidity can lead to banks’ credit expansion, which can in turn increase the rate of money supply growth and fuel inflation.

Last month, the inflation rate rose sharply to 15.5% on year from 2.5% in March 2004 due to high global oil prices and growth in money supply.

The Central Bank is, however, wary of curbing inflation by raising interest rates as it doesn’t want to stall economic growth.

It has chosen to allow the market to subscribe to its treasury bill holdings as an alternative measure.

So far the monetary authority has held four special treasury bill auctions in March and April outside of weekly treasury bill auctions, with maturities ranging between 32 days and 51 days.

The first two auctions – for Rs. 1 billion and Rs. 2 billion – were fully subscribed. The Central Bank accepted Rs. 1.4 billion in the third auction after offering to sell Rs. 2 billion worth of treasury bills.

Bids at the fourth auction for Rs. 2 billion were rejected as they were too high, Wijesinghe said.

The treasury bill yield at weekly auctions rose to 8.12% last week from 7.76% at the start of the month due to the sharp rise in inflation. – Dow Jones