Policy Stance

Mar 08, 2013 (LBO) – Sri Lanka is holding its main policy rates a little below annual inflation of 9.8 percent, expecting prices to ease from March and has asked banks to cut lending rates to boost growth. The Central Bank said in its March monetary policy statement that the repo rate at which excess money is drained from the system will be kept at 7.5 percent and the reverse repo rate at which money is injected will be kept at 9.5 percent.

“However, inflation is expected to turnaround from March 2013 onwards, and reach a more favourable level by the end of the year,” the Central Bank said.

Sri Lanka’s Central Bank kept inflation at low single digits with a rupee peg acting as an external anchor but, lost control of the monetary system from mid 2011 by trying to sterilize foreign exchange sales with printed money and not allowing market rates to go up.

Currency Peg

Sri Lanka’s rupee started to depreciate from February 2012, after the currency peg was allowed to move according to fresh money printed by the Central Bank, with the rupee falling to 134 rupees to the US dollar from 110 by mid-year and diving inflation up.

In second half of the year the rupee appreciated towards