Monetary Board to tighten policy to contain inflationary pressures

MONETARY POLICY: The Central Bank of Sri Lanka announced on Friday that the Monetary Board decided to further tighten the monetary policy to subdue the demand pressures arising from monetary expansion and to contain inflationary pressures and inflation expectations.

Consequently, the Central Bank's policy rates, viz. the Repurchase and Reverse Repurchase rates, will be increased by 37.5 basis points to 10.00 per cent and 11.50 per cent, respectively.

The Central Bank has noted that despite several policy rate increases in the past, banks have not sufficiently raised deposit rates. Therefore, the Central Bank wishes that all banks raise deposit rates in line with the current policy rate increase and pass the benefit to their depositors.

The Central Bank further firmed the tight monetary policy by raising repo and reverse repo rates by additional 50 basis points in September 2006, and continued to conduct active open market operations to mop up all excess liquidity from the banking system.

These measures were supplemented by imposing several prudential measures. These measures have been instrumental in moderating high growth in monetary aggregates.

However, reserve money growth rose to 18 per cent by end November 2006 and broad money grew at 16.8 per cent in October 2006 requiring continued monetary policy action. Government recurrent expenditure has increased above the budgetary targets, necessitating increased bank borrowings.

The Central Bank said in a release: "The economy continues to grow at a healthy rate. The Agriculture sector is expanding though some sub sectors have faced a setback. The increased growth arose from better irrigation facilities, improved technology, high international prices, improved fertilizer application, and increased activities in the fisheries sector.

A favourable impact from weather was seen on paddy in Maha season, and coconut. Delayed rains have had a negative impact on Yala paddy harvest.

Tea production will fall below expectations due to the on going labour unrest. Heavy rains in the latter part of the year also had a negative impact on vegetable production, raising vegetable prices.

High vegetable prices may remain till early 2007 implying the possibility of having higher headline inflation. The Agriculture sector is expected to grow at a healthy rate in 2007 too, the Bank further announced.