Sri Lanka to keep pat on rates to curb credit: CB Governor

Nov 28, 2011 (LBO) – Sri Lanka will maintain its policy rates and maintain reserve ratios for the moment despite falling inflation in a bid to curb credit, Central Bank Governor Nivard Cabraal said. The rupee has come under pressure from excessive credit growth in recent months and there have been steady interventions in forex markets and there was heightened uncertainty after a surprise devaluation was announced in the budget.

“Interventions have reduced,” Cabraal said.

“Also we expect the market to stabilize now after the initial uncertainty.”

“Even when the inflation came down, we kept the policy rates a little higher than people expected,” Cabraal said.

“We were concerned about the credit growth. Now we are seeing credit growth also easing. I think the rates fit well with the rest of the macro fundamentals.”

Sri Lanka has a policy corridor of between 7.00 percent to drain excess liquidity and 8.50 percent to drain liquidity. The monetary authority can also inject or drain excess liquidity through cash auctions.

From today, cash auctions to drain liquidity will be ended, deputy governor Dharma Dheerasinghe said.

Sri Lanka also has a reserve ratio or the share of deposits in commercial banks that must be kept at the Central Bank of 8.0 percent. Cabraal said there will be no immediate changes in the reserve ratio.

Sri Lanka’s money and forex markets are settling down after some volatility partially sparked by a surprise devaluation last week. Market rates have also edged up over the yield curve.