Sri Lanka holds policy rates, despite inflation pick up

Dec 14, 2009 (LBO)- Sri Lanka’s central bank said it was holding its key policy rate at which money is injected to the economy at 9.75 percent, and the rate at which money is drained at 7.50 percent, to support credit growth, despite a pick up in inflation. “Prospects for domestic economic activity have improved with the more favourable investment climate that now prevails and the gradual recovery of the world economy, supported by the relaxed monetary policy stance of the Central Bank,” the monetary authority said in its December policy statement.

“Hence, it is expected that credit flows will gradually pick up, with the more favourable credit conditions that prevail on account of the decline in market interest rates as well as the more stable conditions in financial markets.”

The Central Bank said the outlook for inflation was “benign” though inflation in the 12-months to November picked up to 2.8 percent from 1.4 percent a month earlier.

Credit Flows

There have been rising concerns that inflation was being stoked up amid loose US monetary policy (the rupee is pegged to the dollar) and excess liquidity in the banking system.

Worsening fiscal deterioration may also demand a rate rise. However, market interest rates have been