Sri Lanka leaves interest rates at current levels for fifth straight month

May 15, 2006 (LBO) – Sri Lanka’s Central Bank opt to maintain its policy rates for the fifth straight month Monday amidst a possible bottoming out of inflation, though private sector credit demand has shown little signs of abating. The repurchase rate, which drains the money from the banking system, stays at 8.75 percent, while the reverse repurchase rate remains at 10.25 percent, the bank said following its monetary policy meeting.

The repurchase rate is the return on cash deposited by commercial banks with the central bank and the reverse repurchase rate is the cost of borrowing from the Central Bank.

Investor’s were not surprised by the bank’s decision, though a move to make its decision public two days ahead of schedule caught market players off guard.

The bank has in the past strayed away from its advance release calendar releasing its regular monthly policy review ahead of schedule.

The bank raised key interest rate by 1.25 percentage points in four stages in 2005, to cool inflationary pressures brought about by excessive credit expansion.

Since then, inflation has fallen by around 50 basis points from 12.5 percent in October 2005 to 9.2 percent in April 2006, giving the bank room to cut rates to encourage economic expansion.

However, point-to-point inflation rose sharply from a 23-month low of 6.4 percent in March 2006 to 9.2 percent in April 2006, as the government raised fuel prices by 8.00 rupees mid-April, for the first time since June last year.

However, money supply growth remains high, fueled by credit expansion and improving foreign reserves.

Broad money, which peaked at 21.5 percent in October 2005, as a result of the higher expansion in credit to the private and public sectors, “continues to grow at around 20.0 percent.”

However, reserve money growth has been contained at 15.0 percent for the three months to March.

The bank expects broad money growth to decline further, reflecting the effects of monetary policy measures taken.

“Hence, the continuation of the current monetary policy stance is needed for the attainment of the required deceleration in the rate of growth in broad money supply,” the statement said. The next regular statement on monetary policy is scheduled for Thursday June 15.

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Central Bank’s monetary policy statement

– Mel Gunasekera