Sri Lanka policy rates frozen amid rising inflation, excess liquidity

Mar 18, 2010 (LBO) – Sri Lanka held policy rates frozen in March as inflation accelerated, central bank financing of the budget deficit increased to new highs amid frantic attempts to mop excess liquidity. The International Monetary Fund has already suspended a deal after the 2009 budget deficit went off the rails to 10.3 percent of gross domestic product.

The Central Bank’s Treasury bill stock rose to 58 billion rupees this week, de-railing a plan by the monetary authority in its January monetary policy roadmap to create new money this year only out of foreign assets.

The Central Bank lost about 50 million US dollars defending a dollar peg in February as domestic liquidity creation increased.

Last week bids for an entire weekly Treasury auction of 10.5 billion rupees was rejected raising more concerns about money printing and prospects for future inflation.

Bill auction rejections and buying them with printed money has been a clear red flag for macro-economic instability in the past. The three month Treasury bill rate was 8.38 percent two weeks earlier.

Any short term bill purchases by the Central Bank