Sri Lanka central bank holds policy rates steady

Sept 21, 2010 (LBO) – Sri Lanka’s central bank said it has decided to hold policy interest rates steady at a meeting Tuesday given falling market rates and increased credit flows to the private sector. The central bank said it expects market interest rates to fall further.

“Market interest rates continued to adjust downwards in response to the monetary policy measures taken by the Central Bank in the recent past,” the statement said.

“The benchmark yield curve for government securities trading in the secondary market has also continued to move downwards and has become flatter in the recent months, reflecting the prevailing low inflation and the favourable outlook for inflation.”

Other market interest rates have, in turn, decreased.

Nevertheless, the central bank said, it has been noted that adjustments to lending rates of financial institutions generally tend to lag behind the adjustments to their cost of funds. “Hence, it is expected that market lending rates would decline further in the period ahead, to fully reflect the recent relaxation of the monetary policy stance of the Central Bank.”

The central bank said that in response to the improving credit conditions, credit flows to the private sector continue to increase.

By July 2010, credit obtained by the private sector from commercial banks recorded a year-on-year increase of 8.9 percent.

Credit disbursed by licensed commercial banks, licensed specialised banks and registered finance companies, together, recorded a year-on-year increase of 9.9 percent, in July 2010.

“Credit flows to the private sector are expected to increase further in the period ahead, given that Sri Lanka’s economy is poised to grow by an encouraging 7.5 to 8.0 percent in 2010, following the GDP growth of 7.8 percent in the first half of 2010,” the central bank said.

The release of the next regular statement on monetary policy will be on October 21, 2010. The Repurchase rate of the Central Bank would remain at 7.25 percent and the Reverse Repurchase rate at 9.00 percent, a statement said.