Sri Lanka’s Central Bank raises policy rates

Sri Lanka’s Central Bank raised short term interest rates by quarter percentage point on Tuesday, the second increase in three months, in a bid to reign in galloping inflation Sri Lanka’s Central Bank raised short term interest rates by quarter percentage point on Tuesday, the second increase in three months, in a bid to reign in galloping inflation The repurchase rate, which drains money from the banking system, is up to 8.50 percent and the reverse repurchase rate goes up to 10.00, the Central Bank said in a statement posted on its website.

The bank said inflation as measured by the Colombo Consumer Price Index, has crept up to 10.80 percent (in July) and 10.90 percent in August.

What Calendar? Central Bank’s decision to release its monetary policy decision four days ahead of schedule took market players by surprise. The bank releases its advance release calendar earlier in the year, to ensure equality to all market players. In the past, rates were changed in a somewhat haphazard, giving some market players undue advantage. After training the markets to behave in a systematic manner, the bank seems to be reverting back to its old habit of releasing the statements early. Today’s surprise release is the third in the series of such ‘sudden announcements’.

The moving average increased from 12.70 percent in July to 12.80 percent in August, the bank said in its economic review following its monthly monetary policy meeting.

“As a result of continued efforts by the Central Bank, reserve money has been growing closer to the targeted path,” the bank said.

The Central Bank drains excess liquidity through open market operations, on an overnight basis as well as adjusting policy interest rates.

“However, the growth in reserve money experienced in August 2005 was 18.30 per cent, which is above the targeted path.”

Correspondingly, broad money growth too has been rising at around 19.00 percent largely due to expansion in the private sector credit.

“This situation calls for adopting appropriate policy measures aimed at slowing down the growth rates in monetary aggregates,” the bank said.

Policy rates were last raised by 50 basis points in June

Sri Lanka’s Central Bank has raised its benchmark interest rate twice this year to help damp inflation that has been accelerating due to higher global oil prices.

The next monetary policy announcement is scheduled to be released on Friday October 14, 2005.

Read full monetary policy statement :

http://www.centralbanklanka.org/Press_13092005.doc

-LBO Newsdesk: LBOEmail@vanguardlk.com