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Sri Lanka Monetary Conditions Tightening: Central Bank
Source: lankabusinessonline.com
Source Date: Friday, May 11, 2012
Focus: ICT for MDGs
Country: Sri Lanka
Created: May 15, 2012

Sri Lanka's central bank kept its key policy rate unchanged at 9.75 percent saying monetary conditions are tightening and credit growth will moderate, eventually helping the exchange rate.

Sri Lanka's exchange rate came under pressure and the Central Bank lost foreign reserves as loan growth and imports were accommodated and accelerated with central bank credit (printed money) after sterilized forex sales started in August.

In March with a partial float of the currency, central bank money injections to the economy reduced, with sterilized sales falling away. The rupee however fell to 130 to the US dollar from 110 due to pressure from sterilized forex sales.

Total loans taken by the private sector, the central government and loss-making state enterprises shot up to 140.9 billion rupees in January, but has since fallen to 115.1 billion in February and to 110.7 billion in March, according to Central Bank data.

The March loan totals may include possible forex losses on dollar loans.

"With respect to monetary developments, market interest rates have moved up gradually, reflecting the tightening of monetary conditions," the Central Bank said in its March monetary policy statement.

"Benchmark Treasury bill yield rates have increased and in turn, deposit and lending rates of commercial banks as well as other financial institutions have shown an increasing trend."

Even if total loans do not fall as long as loans are matched by deposits, the exchange rate will not come under pressure as aggregate demand will not be change, but there will be shift from consumption to saving.

Though policy rates were only raised 125 basis points to 9.75 percent Treasury bill yields have topped 12 percent, a rise of around 500 basis points since August and dealers say money that fled the Treasuries markets to banks are now returning.

The Central Bank has also stopped buying Treasury bills to print money after April and allowed interest rates to rise, eliminating the key trigger of instability in the monetary system. In late April the rupee came under renewed pressure from money printed to pay April state salaries.

The Central Bank said that "policy measures implemented thus far are sufficient to moderate the expansion of both credit and the trade deficit," and it expects both monetary aggregates and imports to slow the course of this year.

It will also "closely monitor monetary and external sector developments and adopt further measures if necessary in the months ahead."

The central bank said broad money supply grew 22.8 percent in March from a year earlier, but is expected to slow. Consumer prices rose 6.1 percent in April from a year earlier.

Sri Lanka's monetary base, or reserve money has also been expanding rapidly over the last few months.
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