Sri Lanka’s Central Bank freezes key interest rates

October 12, 2006 (LBO) – Sri Lanka’s central bank held rates steady at its October monthly monetary meeting, two weeks after an ad hoc rate rise of 50 basis points. The bank said its benchmark reverse repurchase rate, used to manage liquidity and contain inflation, will remain at 11.125 percent.

The short-term repurchase rate at which it lends to commercial banks stays at a 3 ½ month high of 9.625 percent, the bank said following its monetary policy meeting on Wednesday.

The central bank’s unscheduled 50 basis point increase last month has taken the repurchase (repo) and reverse repo (reverse repurchase) rate up to 87.50 basis points.

The bank shut its standby cash facility available to market players for two days and unexpectedly raised borrowing costs subsequently to curb ‘excessive’ borrowings.

“In response, many banks have adjusted upward both deposit and lending rates, which is expected to decelerate the high expansion in private sector credit and monetary aggregates, thereby contributing to contain inflationary pressures in the economy.”

At this week’s treasury bill auction, rates went up by 50 basis points.

Consumer prices in Sri Lanka rose to 15.4 percent in Sept from 15.3 percent in August, after hitting a record 17.7 percent in June.

When inflation soared last year, the bank regularly tightened monetary policy, adding 125 basis points to interest rates throughout the year.

Dealers expect the bank to tighten policy rates by at least another 25-50 basis points this year to curtail credit growth.

“If inflationary pressure doesn’t taper off with the last rate hike, further increases may be warranted between November and the end of the year,” First Capital Group said in a report this week. The next monetary policy announcement is scheduled for November 14.