Sri Lanka mounts an interest rate defence on peg

Feb 03, 2012 (LBO) – Sri Lanka’s Central Bank hiked rates by 50 basis points to 9.0 percent mounting an interest rate defence of its peg with the US dollar, and slapped a credit ceiling as foreign reserves fell by a quarter in 2011 due to high loan growth. The Central Bank said its reverse repo rate at which money is injected to market will be raised to 9.0 percent and the repo rate at which excess money is drained will be hiked to 7.50 basis points.

The spot dollar also fell 20 cents to trade at 114.20 cents, dealers said.

For 2012 the central bank is also imposing a credit ceiling of 18 percent for banks funding loans with domestic deposits and 23 percent if the extra 5 percent could be financed overseas.

The rate increase came as inflation fell to 3.8 percent in the 12 months to January 2012 from 4.9 percent in December 2011.

The Central Bank said credit to business rose 34.5 percent by December 2012, “substantially exceeding projections.”

Analysts had warned that credit is increasing partly due to liquidity injections made by the central bank to offset interventions made in the forex markets.

Pressure on the currency peg was also ris

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