Central Bank keeps interest rates steady

MONETARY POLICY REVIEW: The Monetary Board at its meeting held on August 15 decided to maintain the policy interest rates of the Central Bank at their current levels and to continue with the conduct of open market operations to decelerate the monetary expansion to the desired path.

Accordingly, the Central Bank's policy rates, viz. the Repurchase and Reverse Repurchase rates, will continue to be at 9.125 per cent and 10.625 per cent, respectively the Bank said yesterday.

Economic activity continues to expand as expected, underpinned by the robust global economic growth and sustained domestic demand.

All major sectors are expected to perform well and contribute to overall growth in the economy. The Agriculture sector is expected to expand in 2006 mainly due to better performance of tea, rubber and coconut, and the expected recovery in the fisheries sector. Maha 2005/2006 paddy production reached a record harvest level.

The Industry sector is expected to grow further in 2006 benefiting from the improvements in both export-oriented industries and domestic market oriented industries.

The continued expansion in construction activity bolstered by the expansion in both residential and non-residential construction, and increased hydropower generation would contribute further to the expansion of the Industrial sector output.

Within the services sector, the dynamism seen in the main sub sectors of trade, telecommunication, transportation and financial services, will continue in 2006.

International trade is expanding on both import and export fronts. Cumulative exports grew by 8.8 per cent during the first six months of 2006, reflecting the higher growth in exports of rubber based products, textiles and garments, and food and beverages. Imports grew at a faster rate of 20.3 per cent in the first half of 2006 due to the higher increase in intermediate and investment goods.

The increase in the imports of intermediate goods was led mainly by historically high petroleum prices. Imports of investment goods were driven largely by the imports of transport equipment, machinery and equipment and building materials. Although the trade deficit widened, it was partially offset by higher foreign currency inflows to the country through private remittances, which grew at 24 per cent during the first half of 2006, and higher net inflows to the government.

Accordingly, the balance of payments (BOP) has recorded a surplus of US dollars 164 million by end July 2006. Reflecting the BOP surplus, the gross official reserves have increased to US dollars 2,542 million by 11 August 2006 from US dollars 2,458 million at end 2005.

The high increases in consumer prices arising from past high monetary growth moderated somewhat in July 2006 responding to tight monetary policy measures. Inflation, measured as the point-to-point change in the Colombo Consumers' Price Index, declined from 17.7 per cent in June 2006 to 14.7 per cent in July 2006, and is expected to moderate further.

However, the Monetary Board expressed concern over the continuing rise in international oil prices exerting pressure on the country's balance of payments. This had made it necessary for the country to increase domestic fuel prices.

The possible solutions include all to conserve energy and economise the use of fuel, since the country cannot continue to subsidise the energy consumption.