Sri Lanka’s central bank holds rates, warns against SOE credit

Jan 17, 2013 (LBO) – Sri Lanka’s policy rate at which liquidity is injected to the market will remain at 9.5 percent following a 25 basis point rate cut last month, the Central Bank said, but warned against rising credit to state enterprises.

The Central Bank said the exchange rate has appreciated 5.3 percent against the US dollar in the second half of 2012. Up to January 15, the rupee had appreciated a further 0.6 percent.

Analysts say there could be threats to the exchange rate in 2013 due to plans by the Central Bank to engage in term cash injections.

An exchange rate appreciates permanently when a central bank sterilizes foreign exchange purchases by withdrawing credit and falls when sales are sterilized with liquidity injections.

The Central Bank said inflation which rose to 9.5 percent in November 2012 had eased to 9.2 percent by December.

“Effective demand management policies that were in place in 2012 are likely to have moderated aggregate demand sufficiently, reining in future inflation and inflation expectations,” the Central Bank said.

“As a result, inflation is projected to moderate from March 2013 and reach mid-single digit levels thereafter.”

In 2013 private sector credit is projected to gro