Inflation expected to moderate

The Central Bank has been vigilantly monitoring the developments in the market interest rates, noting the high and volatile nature of these rates and its implications on the smooth functioning of the market.

The Bank will continue to conduct its Open Market Operations to maintain reserve money within the targets while managing market liquidity without permitting excessive volatility in short term interest rates the bank said yesterday.

Inflation, as measured by the point-to-point change in the New Colombo Consumers' Price Index - CCPI (N), increased by 20.8 per cent in January 2008 compared with 18.8 per cent in December 2007.

Accordingly, the annual average inflation moved up to 16.4 per cent in January from 15.8 per cent at end December 2007.

During 2007 the Central Bank further continued with its tight monetary policy stance and as a result, it was able to reduce the high monetary expansion witnessed during the previous year.

The stringent quarterly targets for reserve money were comfortably met and end year reserve money growth was contained at 10.2 per cent which is the lowest growth in last five years and well below the 21.2 per cent growth in 2006.

The deceleration continued in 2008 and the reserve money was well within the indicative target set for January 2008.

Benefiting from these developments, the broad money supply also decelerated to 16.6 per cent by end 2007 compared with 17.8 per cent at end 2006. Within the domestic credit, growth in credit to the private sector, which has been growing at 25-26 per cent during the first half of the year, continued its declining trend to reach 19.3 per cent, the lowest growth rate witnessed in 2007.

Net credit to the government from the banking system during the year stood at Rs. 17 billion, which is consistent with the budget estimates.

Credit to public corporations increased beyond the desirable levels during 2007 but is expected to improve during 2008 with the expected price revisions.

The continuation of decelerating growth in monetary aggregates is expected to exert a beneficial impact in containing future demand driven inflationary pressures.

As such, inflation is expected to moderate to lower levels during the second half of the year with the further containment of demand pressures as well as the phasing out of the one-off impact of the removal of fuel subsidies.