Sri Lanka’s Central Bank maintained policy rates for the fourth straight month

Apr.12 (LBO) – Sri Lanka’s Central Bank Wednesday maintained policy rates for the fourth straight month as they are comfortable with economic expansion, though private sector credit demand has not shown signs of abating. The repurchase rate, which drains the money from the banking system, stays at 8.75 percent, while the reverse repurchase rate remains at 10.25 percent, the bank said following its monetary policy meeting.

The bank hiked key interest rate by 125 basis points in four stages last year, to curb inflationary pressures arising from high global oil prices and higher bank lending.

However, money supply growth remains high, fueled by credit expansion and improving foreign reserves.

Broad money, which peaked at 21.5 percent as a result of the higher expansion in credit to the private and public sectors, “still remains a concern as it grows around 20.0 percent.”

However, reserve money growth has been contained at 15.0 percent so far.

The bank expects broad money growth to decline further, reflecting the effects of monetary policy measures taken.

“The continuation of the current monetary policy stance…would help mitigate inflationary pressures further,” the statement said.

Since then, inflation eased to a 14-month low of 9.6 percent, giving the bank room to cut rates to encourage economic expansion.

While further downside in inflation appears likely in the short term, a potential hike in fuel retail prices could give a one-off push to inflation.

Central Bank has said earlier that a 10 percent rise in fuel prices could have a 1.5 percent impact on the consumer price index.

Retail fuel prices have not been adjusted since June 2005 due to political pressure, but with no elections lined up in the short-term, gives room for prices to be raised and reflect global prices.

However, the Finance Ministry on Tuesday gave a broad indication that a fuel price hike was imminent as the government is splashing billions of rupees to cushion consumers against rising global fuel prices.

“In 2005, the government had to spend Rs25 billion to sell fuel below cost,” the Treasury statement said. “The lifting of value added tax cost a further Rs7 billion.”

The Finance Ministry now says the Rs32 billion could have been better spent on development activities and uplifting the poor.

Oil prices are now touching US$70 a barrel from around US$53 a barrel in April 2004.

Investors were not surprised by Wednesday’s announcement as the bank continues to maintain that inflation will ‘be moderate’ this year.

“We believe that Central Bank will defer such a decision (change in policy rates) until the situation vis-à-vis any potential petroleum retail price hikes and their likely impact on inflation becomes clearer,” said economist Channa Amaratunga of Boston Asset Management.

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


Please click to read Central Bank’s m
onetary
policy review – April  2006

-Mel Gunasekera: mel@vanguardlk.com