Sri Lanka’s Central Bank hikes short term interest rates by half a percent

September 28, 2006 (LBO) – Sri Lanka’s Central Bank Thursday hiked short term rates by 50 basis points, two days after shutting the bank’s standby cash facility to market players. Gilt prices crashed in thin trading with some dealers quoting 14.0 percent for discounting treasury bills for small value customers of around 100,000 rupees, but t-bills over a million rupees were quoted at around 16.0 percent, up around 530 basis points from Monday. The bank said its benchmark reverse repurchase rate, used to manage liquidity and contain inflation, goes up 50 basis points to 11.125 percent.

The short-term repurchase rate at which it lends to commercial banks rises 50 basis points to 9.625 percent, the bank said following its economic review.

“The Board observed that inflation has not declined to a satisfactory rate as yet,” the statement said referring to consumer prices that have climbed to a high of 15.3 percent in August.

“The Board witnessed an unusual increase in lending by commercial banks and substantially higher borrowings from the Central Bank through the reverse repurchase window. Such excessive borrowings have led to added inflationary pressures,” the statement said.

The bank’s decision to withdraw its standing cash facility has hit short-term treasuries, with Sri Lanka’s public debt office rejecting bids at Wednesday’s auction and dealers refusing to discount gilts as prices crashed.