Sri Lanka central bank raises reserve ratio to counter inflation

Apr 12, 2011 (LBO) – Sri Lanka’s central bank raised its reserve ratio, the amount of deposits that banks must hold at the monetary bank by 100 basis points to 8.0 percent to draw in excess liquidity and contain inflation. Sri Lanka’s inflation accelerated to 8.6 percent in March, the highest in two years amid excess liquidity and also transient supply tightness.

Excess liquidity which was hovering around 80 to 90 billion rupees in February and March 2010 fell to 68 billion on April 12 due to the cash draw downs from banks for the traditional New Year that falls this week.

The Central Bank said broad money grew 17.7 percent in February, with private sector credit growing 29.7 percent.

“While the excess liquidity in the domestic money market remains a concern, left unchecked, it could further expand monetary aggregates, leading to higher inflation than originally envisaged,” the Central Bank said in its monetary policy statement.

“Thus, the Monetary Board considers it prudent to pull back any buildup of demand-side pressure on inflation and ensure continued monetary stability.”

The reserve ratio increases costs of banks and decreases their ability to lend, as they now have to keep the equivalent o