Sri Lanka’s central bank talks down rates

Jan 10, 2008 (LBO) – Sri Lanka’s central bank says that Treasuries yields will continue to ease following steep falls seen in government securities rates in the past two weeks. “It is expected that this declining trend of the interest rate structure in the market will be continued,” the public debt office, which is part of the Central Bank said in a statement.

The statement said rates would fall due to “falling inflation expectations due to the tight monetary policy being pursued by the Central Bank and the recent public debt management strategies being implemented.”

At Wednesday auction 3-month treasury yields fell 118 basis points to 20.12 percent, 6-month bills fell 20 basis points to 19.79 percent and 12-month yields also fell 20 basis points to 19.76 percent

By Thursday 3-month yields had fallen further to 18.50 percent, 6-months to 19.00 percent and 12-month to 19.25 in the secondary market dealers said.

The Central Bank said rate fell due “considerable” buying interest, better liquidity and “favourable investor expectations on inflation.”

In mid 2007 when the central bank promised lower volatility in rates, inflation expectations worsened as the move was correctly interpreted by analysts as a precursor to turning on the printing presses.

In the ensuing months the Central Bank printed 45.2 billion rupees sending inflation close to 20 percent.

However analysts now say market participants should not panic at Thursday’s statement as the Central Bank has not indicated that it will intervene to bring down rates.

In November and December 2007, rates rose steeply as the debt office raised a large volume of money for the government without printing money and intervening in the market.

Analysts say the recent rate falls were mostly due to lower take up of bills and enhanced flows to securities markets in the face of higher rates rather than artificial manipulations.

The monetary authority has also been sterilizing liquidity aggressively with short term bill auctions accepting short term money at rates as high as 20 percent.

Economic analysts say with the Central Bank no longer injecting liquidity via T-bill purchases and the reverse repo window also being tightened, it could now tolerate higher levels of liquidity if it only comes from foreign flows.

However it might be prudent to adjust repo rates to market levels.