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Central Bank lowers policy interest rates

by Chamitha Kuruppu

The Central Bank of Sri Lanka(CBSL) yesterday announced a reduction in policy interest rates for the third time this year and said further reductions could be expected if the present trend in the economy continues.

The Central Bank's Reverse Repurchase rate was reduced from 8.25% to 9.5% per annum, while the Repurchase (Repo) was reduced from 8.25% to 7.5% per annum, from yesterday.

Deputy Governor W. A. Wijewardena told the media in Colombo yesterday that the Repurchase (Repo) and Reverse Repurchase (Reverse Repo) rates were reduced by 75 basis points.

The Bank Rate has also been revised downward from 18% to 15% in line with the reduction in policy rates with effect from yesterday. The Bank rate has not been revised since December 2001 though all other interest rates have declined continuously. Wijewardena said that the recent economic developments have warranted a review in these rates adding that the reduction will not have any inflationary impact and will not lead to any reduction in all lending rates adequately and immediately.

The reduction in policy interest rates is expected to reduce cost of interest encouraging investments and will also reduce spread market rates. Consequently high investment will lead to higher growth and more employment benefiting customers, investors and producers, Wijewardena said.

According to available indicators, inflation and inflation expectations have been declining and the inflation rate, which is 8% at present is expected to fall further to 6.5% to 7% by the end of the year.

Monetary expansion up to end June has been within the target set at the beginning of the year and there has been continous excess liquidity in the market.

The containment of public sector borrowing, despite a possible shortfall in government revenue, has reduced pressure on domestic market interest rates, causing them to decline. There has been continued stability in the foreign exchange market and several international interest rates have also been reduced.

Wijewardena said that as this reduction in policy rates is intended to further strengthen the recovery in economic activity the CBSL expects a strong response from all financial institutions through an adequate and immediate reduction in their lending rates. Private sector growth is still below expectation and for the economy to boost private sector credit expansion is vital, he said.

The economic growth of the country during the first quarter of the year was 5.5% and the annual expected growth by the end of the year is 5.5%. There has been a growth in all major sectors including agriculture, industry and services.

Tourism, port activities and stock market indicators have made a significant growth during the first quarter.

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