Central Bank eases monetary policy stance

Since around October 2008, the Central Bank of Sri Lanka has taken a number of steps to promote market liquidity and thereby stabilise money and credit markets, in view of the implications of the turbulent conditions that have prevailed in financial markets the world over.

Since the beginning of this year, the Central Bank has also gradually eased its monetary policy stance, in view of the improving outlook on inflation with a considerable deceleration in monetary aggregates. Inflation, on an year-on-year basis, as per the Colombo Consumers’ Price Index (2002=100) reached a five-year low of 5.3 percent in March 2009.

The expansion in the money supply has decelerated to 9.9 percent together with a sharp deceleration in credit to the private sector to 5.6 percent by February 2009.

Given the continuing decline in the general price level and the demanding conditions facing the real sector, the Central Bank is of the view that its monetary policy stance should be eased further. Accordingly, the Monetary Board has decided to reduce the Penal rate of interest charged on reverse repurchase transactions with the Central Bank by 175 basis points to 13.0 percent.

The Monetary Board has also decided to reduce its Repurchase rate by 125 basis points to 9.0 percent to encourage commercial banks to lend their surplus funds to customers rather than entering into repurchase agreements with the Central Bank. Both these measures are to take effect immediately.

The Central Bank expects that these measures would result in more active lending by commercial banks supported by a reduction in their lending rates in accordance with the reduction in policy rates, thereby augmenting credit flows to the economy.

In view of the lower than expected inflation, moderation of growth prospects and the downward revision in the Statutory Reserve Ratio (SRR) in February 2009, the Central Bank has decided to revise its reserve money targets for the last three quarters of the year 2009.

Accordingly, the targeted growth in annual average reserve money has been brought down from 5 percent to 2.8 percent. The revised targets for the three remaining quarters of the year 2009 are given below. The revised reserve money targets would provide sufficient space for the Central Bank to relax the monetary policy further, if necessary.