Sri Lanka central bank holds rates amid low inflation

Oct 13, 2009 (LBO) – Sri Lanka’s Central Bank is holding its main policy rate steady at 10.50 percent amid low inflation, expecting the effect of previous cuts to spread wider into the banking system.

Weak Credit

In the year to August private sector credit was down 4.6 percent according to Central Bank data, while credit to government rose in a flight-to-Treasuries behaviour in banks, and a widening budget deficit as tax revenues also fell amid an economic downturn.

The monetary authority said global inflation may pick up moderately as the effect of a burst commodity bubble wears off.

“Nevertheless, inflation in Sri Lanka is expected to be at subdued levels in the approaching months, with current inflation remaining at around 1 per cent during the four months up to September 2009,” the Central Bank said.

As a result it said existing “policy interest rates do not require any adjustment at the present time, since the policy measures adopted so far are still supportive of the desired outcome of gradual easing of the credit conditions in the country.”

Lower prices, steeply falling commodity prices which discourage stock holding and lower working capital needs also redu