Sri Lanka interest rates tied to inflation, Fed: CB Governor

Jan 01, 2016 (LBO) – Sri Lanka will review policy interest rates based on inflation outlook and external factors such as Fed interest rates, the Central Bank Governor told a press conference.

“The key thing to look at is inflationary expectations and that is something we have full responsibility for,” Governor Arjuna Mahendran said.

The Monetary Board raised the statutory reserve ratio (SRR) of commercial banks by 1.50 percentage points to 7.50 per cent on Wednesday but left policy rates unchanged, the first change to the SRR since July 2013.

“Our statutory reserve ratios are low by international standards. For every rupee that a bank receives in terms of deposits it could lend 94 cents in the past, now its 92 and a half cents,” he said.

The raising of the SRR would curtail lending that has been seeping out of the balance of payments through non-oil imports he added.

“Basically there has been an overhang of excess of liquidity in the money markets, and this has been gradually decreasing,” he said.

Mahendran said he doesn’t rule out the possibility of raising interest rates, but other factors to watch include the US Fed’s tightening of monetary policy and the European Central Bank and Bank of Japan’s tendency to ease monetary policy.

“Let’s watch and see what the Fed reserve does in the months to come. It would be damaging for the economy to raise interest rates aggressively at this point,” he said.

“We don’t want the general structure of interest in the economy to rise. By raising the SRR we are able to confine those rate increases to the very short term interest rates in the money markets,” he said.