Sri Lanka’s Central Bank stays pat on interest rates

Feb. 16 (LBO) – Sri Lanka’s Central Bank Thursday stayed put on policy rates for the second straight month, as it expects the 25-basis point hike last December to put the brakes on money supply growth. Overnight repurchase rate remains at 8.75 percent and the reverse repurchase rate stays at 10.25 percent, the bank said in a statement.

The repurchase rate is the return on cash deposited by commercial banks with the Central Bank and the reverse repurchase rate is the cost of borrowing from the Central Bank.

But persistent excess liquidity in the system has increased the importance of the repurchase rate.

Investors were not surprised by the bank’s decision as authorities continue to maintain that inflation will ‘moderate’ this year.

A rate hike could curb economic growth, while rate cut could fuel inflation in a country which has weak fiscal policies and loss-making state corporations driving credit growth.

Sri Lanka’s inflation rate slipped to 11.1 percent in January from 11.6 percent in December, based on the 12-month moving average.

Last year, most Asian Central Banks like Philippines, India, Indonesia and Thailand raised policy rates to curb inflation as budget deficits expanded to absorb rising energy prices.

However, Sri Lanka’s Central Bank is not too worried saying: “Inflation in 2006 is also expected to remain at moderately low rates without posing a significant threat to the growth momentum.”

Inflation in this tropical island of 19.5 million people, torn by ethnic conflict and with the coastline devastated by the tsunami, has been fuelled by an expansionary fiscal policy and loose monetary policy in 2004.

“The monetary policy measures taken since end 2004 by the Central Bank have been instrumental in restraining the excessive growth in money supply.”

However, the island’s money supply growth remains high, fuelled by credit expansion and improving foreign reserves.

Broad money, which grew at around 20.0 percent as a result of the higher credit expansion to the private and public sectors, has declined to 19.1 percent by December 2005.

The next monetary policy announcement is scheduled for March 15.



Please click to read central bank’s monetary
policy statement:

-Mel Gunasekera: mel@vanguardlk.com