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Central Bank further reduces interest rates

The Central Bank reduced its Repurchase (Repo) rate and Reverse Repurchase (Reverse Repo) rate by 75 basis points to 9.00 per cent and 11.00 per cent, respectively from yesterday taking into account reductions in domestic market interest rates, excess liquidity, current and expected developments in inflation, stability in the foreign exchange market and movements in international interest rates. The change is also intended to further strengthen the recovery in economic activity. The last change in these rates was on November 22 when the Repo rate was reduced by 75 basis points and the Reverse Repo rate by 100 basis points.

The Repo rate is the rate at which commercial banks and primary dealers can invest their surplus funds in Treasury Bonds and Treasury Bills held by the Central Bank, while the Reverse Repurchase rate is the rate at which commercial banks and primary dealers can obtain funds from the Central Bank against the collateral of Treasury Bills and Bonds.

Recent economic developments have warranted a review of the main policy rates of the Central Bank. The excess liquidity in the market has led to a continuous decline in yields on Government paper. The yield on 91-day Treasury Bills has declined by 98 basis points and the yield on 364-day bills by 156 basis points since the last reduction in Central Bank rates. Economic activity is gradually picking up from the recession in 2001. The third quarter of 2002 recorded a growth of 5.3 per cent, in contrast to a contraction of 4.2 per cent in the corresponding quarter of 2001.

This growth has been facilitated by the policies adopted by the Central Bank and it is necessary to continue to strengthen the recovery, The Bank said in a news release.

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