Reserve money well within target - CB

Reserve money, which was maintained within the quarterly targets during 2007, was well within the first quarter target for 2008. The broad money supply, which decelerated to 16.6 per cent in December 2007, has further decelerated to 13.9 per cent by end February 2008.

This deceleration is in line with the slowing down in the growth of domestic credit aggregates, i.e., credit to the government, private sector and public corporations. Net credit to the government was maintained within the budgeted levels in 2007 and reports a decline thus far in 2008.

Growth in credit to the private sector continued to decelerate further reaching 15.8 per cent in February 2008 from the peak of 25-26 per cent in the first half of 2007.

Although credit to public corporations also declined to Rs. 47.5 billion during February, further decline in the coming months is warranted to reach the desired levels, the Central bank said.

The measure of underlying inflationary pressures, compiled by removing food and energy prices from the consumer price index, revealed that core inflation remained at 9.3 per cent in March 2008.

However, domestic supply constraints fuelled by the surging international commodity prices resulted in headline inflation reaching a higher level during the month.

Accordingly, headline inflation, as measured by the point to point change in the New Colombo Consumers' Price Index [CCPI (N)] increased to 23.8 per cent in March from 21.6 per cent recorded for February 2008.

Nevertheless, the effectiveness of the demand management policies of the Central Bank over the past many months has been reflected in the real domestic aggregate demand decelerating to 5.8 per cent in 2007, from the higher rate of 8.6 per cent observed in the previous year.

The decelerating aggregate demand as well as the moderate core inflation indicates that the prevailing gap between headline and core inflation will gradually diminish when the impact of supply shocks die out, the Bank said yesterday.