Sri Lanka policy rates kept steady, market rates up: CB

Dec 16, 2011 (LBO) – Sri Lanka’s active polity rate at which cash is injected to the market would be maintained at 8.50 percent, the Central Bank said, as defence of a dollar peg pushed market rates up. The central banks said the trade deficit was higher this year.

The central bank said there would be inflows from tourism, remittances, inflows to the state for foreign financed projects and foreign direct investments are estimated to have exceeded a target of a billion US dollars.

Meanwhile banks are expected to raise over billion dollars abroad for Tier II capital, the Central Bank said.

Net inflows through the capital account and other inflows such as tourism and remittances increase domestic money incomes, which in turn expands the trade deficit. The Central Bank said foreign inflows, especially on the capital accounts are expected to come.

Sri Lanka overnight rates have moved from the lower policy rate band of 7.0 percent at which excess liquidity in withdrawn from the interbank market towards the 8.50 percent ceiling as the Central Bank became a net seller of foreign exchange.

Foreign exchange sales drain liquidity from money markets push interest rates up. On Friday the c