Sri Lanka’s Central Bank leaves its interest rates steady

Sri Lanka’s Central Bank left its key interest at current levels after hiking it for two consecutive months, as it looks for signs that inflation may ease up. Sri Lanka’s Central Bank left its key interest at current levels after hiking it for two consecutive months, as it looks for signs that inflation may ease up.

The repurchase rate, used to
drain money from the banking system, stays at 8.25 percent, the bank said in a
statement posted on its website on Wednesday

(read statement)
.

The reverse repurchase rate remains steady at 9.75 percent. Policy rates were last raised by 50 basis points in June. A basis point is 0.01 percentage point.

A top bank official said the five-member monetary policy board met earlier than scheduled and opted to release the statement ahead of the due date on Friday morning.

Analysts surveyed by LBO had expected the increase, after monetary board member Deva Rodrigo said last week that interest rates would have to rise in the face of loose fiscal policy.

Addressing members of the Ceylon Chamber of Commerce annual sessions where he was re-elected as Chairman, Rodrigo said that: “At the moment I don’t see any other solution than pushing up the interest rates. Because, if the interest rates are not raised at this level of inflation, our rupee will depreciate. You can’t hold keep the rupee depreciation and interest rates down together when there is a huge budget deficit”.

Inflation as measured by the Colombo Consumers’ Price Index rose 12.6 percent in the 12 months to the end of June, accelerating from a 12.4 percent rise in May, due to an increase in some food prices.

Though the Central Bank thinks otherwise, most traders took cue from Mr. Rodrigo’s remarks and put in high bids for Monday’s bond auction.

The eight-year auction was cancelled but bank accepted slightly high bids for two-year bonds at yields of 10.34 percent, though state-run pension funds are believed to have subscribed to the entire issue.

But the continued monetary expansion remains an area of concern. “Broad money growth remains at around 19.0 percent mainly due to the increase in credit to both the public sector and the private sector, but may moderate due to the lagged effects of monetary policy measures.”

The bank says it will conduct open market operations aggressively to mop up excess liquidity from the market.

“The absorption of a large part of the excess liquidity on a permanent basis through outright sales of Treasury bill holdings of the Central Bank and restraining purchases of Treasury bills from the primary market, helped reduce excess liquidity in the money market.”

The short-term money market, the bank says has adjusted to policy rate hikes of 25 basis points and 50 basis points in May and June respectively.

The Sri Lankan rupee has also gained 4.5 percent against the US dollar so far this year, while gross official reserves have topped US$ 2.37 billion as at end June.

However, ongoing political uncertainty over a minority government has rocked business confidence and may threaten economic recovery from a two-decade long civil war as well as the Dec. 26 tsunami, which killed 39,000 people and left half a million homeless.

Sri Lanka is counting on US$ 3 billion of aid pledged by donors to help rebuild houses, ports, roads and hospitals destroyed by the giant waves along the coast.

President Chandrika Kumaratunga’s government also lost its key coalition partner, the Marxist JVP, after she signed a tsunami aid sharing deal with the Tamil Tiger rebels recently.

The bank’s next monetary policy announcement is due on Wednesday August 17.

Please
click to read full monetary policy statement:


http://www.centralbanklanka.org/Press_13072005.doc

-LBO Newsdesk: LBOEmail@vanguardlk.com