Reserve money growth well within target

The continuous tight monetary policy stance of the Central Bank has been successful in maintaining reserve money well within the target set for the first quarter of 2008, the Bank said yesterday.

This follows the successful achievement of quarterly reserve money targets in 2007, indicating a continuous deceleration in monetary expansion.

At the beginning of 2008, the Central Bank announced its monetary and financial sector policy stance for the year in Roadmap for Monetary and Financial Sector Policies for 2008 and beyond.

This document also enunciated the growth path for reserve money, the operating target of the monetary targeting framework, as well as broad money, the intermediate target and the strategies to be pursued by the Bank in achieving these targets.

The monetary policy implementation strategy since 2007 was more geared towards not exceeding tight quantitative targets of monetary aggregates and thereby allowing market interest rates to adjust upwards in order to curtail the excessive demand.

Accordingly, market interest rates adjusted upwards and continued to remain at a higher level.

Accordingly, the quarterly average of daily reserve money during the first quarter remained at Rs. 273.7 billion compared with the targeted ceiling of Rs. 281.5 billion. The decelerating trend in reserve money experienced since the beginning of 2007 has led to decelerate the growth in broad money supply as well, particularly through the decline in the growth in credit to the private sector.

The private sector credit growth, which was as high as 24- 26 per cent during the first half of 2007, declined steadily thereafter and reached 18.3 per cent in January 2008. Accordingly, the growth in broad money expansion decelerated from 20-22 per cent in the same period to 15.8 per cent in January 2008.

The Bank is carefully monitoring the developments in demand for money, since its lower growth has helped to maintain the first quarter reserve money target with a wide margin.

As such, the Bank may revise downward its respective targets for reserve money and broad money, if necessary, after monitoring and assessing carefully the further developments in key macro-economic variables in order to maintain reserve money at the optimum level to further arrest the demand driven inflationary pressures.