Monetary policy target set for June 2007 achieved

POLICY: The Central Bank is carefully monitoring the developments within the economy as well as managing liquidity at desirable levels to promote economic activities while aiming to achieve single digit inflation on a year-on-year basis by end 2007.

It will continue to employ appropriate monetary policy instruments to achieve the reserve money targets set for September and December 2007, the Bank said yesterday.

Monetary policy is conducted by the Central Bank of Sri Lanka in order to achieve one of its core objectives, i.e., economic and price stability.

Price stability is achieved by influencing changes in the broad money supply which is linked to the reserve money of the Central Bank. An increase in reserve money is the fresh money released to the economy by the Central Bank.

Accordingly, the Central Bank sets operating targets for the quantum of reserve money in the conduct of its monetary policy.

Each year, the expected increase in reserve money is injected into the economy by way of increases in net foreign assets (NFA) and net domestic assets (NDA) of the Central Bank.

When the Central Bank purchases the inflows of foreign currency into the country’s banking system, it increases the NFA of the Central Bank, and thereby raises the reserve money.

Further, through the purchase of Treasury bills by the Central Bank at the primary Treasury bill auctions and secondary market from commercial banks through open market operations and by granting provisional advances to the government, the Central Bank causes an increase in the NDA and thereby raises the reserve money.

The level of reserve money is established, based on the expected economic growth and expected inflation for that year. During the recent past, an annual increase of reserve money of around 15 per cent had been estimated, based on the aforementioned fundamentals.