Sri Lanka’s Central Bank leaves policy rates at current levels

Sri Lanka’s Central Bank opted not to tinker with its benchmark interest rates as the pace of inflation showed signs of easing off. Sri Lanka’s Central Bank opted not to tinker with its benchmark interest rates as the pace of inflation showed signs of easing off. The repurchase rate, which drains money from the banking system, will stay at 8.50 percent and the reverse repurchase rate remains at 10.00 percent, the Central Bank said in a statement posted on its website on Tuesday.

Benchmark rates were last revised upwards in September by 25 basis points.

Policymakers have raised interest rates three times this year to reign in galloping inflation spurred on by higher global oil prices.

Asian economies of India, Philippines, Thailand and Indonesia have periodically hiked policy rates as rising fuel bill spurs inflation.

The International Monetary Fund expects Sri Lanka’s annual inflation rate to reach 14 percent this year, up from 7.9 percent in 2004.

But inflation in the Indian ocean island, fell to 10.5 percent in September, the first time in 16 straight months, as prices of basic food items like fish and vegetable eased off.

“The moving average inflation has also declined in September to 12.7 percent from 12.8 percent in August 2005,” the statement said following a monetary board meeting late Monday.

Growth in reserve money eased off to 18.7 percent by September 2005 from around 20 percent in December 2004.

But credit demand from private and public sector has kept broad money growth at around 19 percent.

Excess liquidity in the money market has fallen from Rs. 17 billion as at end September to Rs. 9.5 billion by 10 October, as a result of aggressive open market operations.

All monetary and credit aggregates are expected to moderate with the continuing monetary policy actions, the bank said.

The island’s balance of payments has recorded a US$ 190 million surplus for the eight months to August this year, largely to due to worker remittances, debt relief from foreign governments and private transfers on account of tsunami relief.

This has also helped gross official reserves to go up to US$ 2,367 million at end August 2005, enough to cover 3.3 months of imports.

The tsunami-hit island is also counting on US$ 3.2 billion in pledges from international donors to rebuild key infrastructure along its damaged coastline

The US$ 20 billion economy is expected to grow by 5.5 percent this year, as good rainfall has helped the agriculture sector to pick up.

Despite political turmoil and unexpected oil shocks, Treasury Secretary P B Jayasundara is confident the country’s budget deficit will not exceed eight percent of GDP this year.

Sri Lanka imports all its oil requirements and the total bill is expected to cost the government US$ 800 million more this year, he said.

The broader public sector deficit, however, would be larger if losses in state enterprises are counted.

The next monetary policy announcement is due on Wednesday November 16.



Please click to read full monetary policy
statement for October

-Mel Gunasekera: mel@vanguardlk.com