Following CB’s monetary policy measures :

Interest rates continue to drop

Market interest rates continue to decline following the monetary policy measures taken by the Central Bank, but they are yet to adjust fully to the policy rate reductions by the Central Bank, a media release from the Central Bank said.

Yields on Treasury bills, which serve as a benchmark for market interest rates, have declined by around 675-715 basis points, so far this year. Meanwhile, the weighted average call money rate has also declined by 500 - 600 basis points. Among other market interest rates, the average weighted deposit rate has declined by about 65 basis points while the average weighted prime lending rate has declined by about 415 basis points, by July.

The decline in interest rates, both in nominal as well as real terms, together with improved business confidence is expected to encourage economic activity in the country during the remainder of the year.

Enhanced external sector stability in recent months has enabled the Central Bank to build its foreign exchange reserves substantially while curtailing volatility in the exchange rate. Net foreign exchange purchases by the Central Bank in the domestic foreign exchange market have continued to be positive since early July, supported by the steady inflow of remittances, export proceeds and non-resident investments.

By Monday net foreign exchange purchases by the Central Bank in the domestic market had exceeded US dollars 600 million. The disbursement of the first tranche of the IMF-SBA facility has further boosted gross external reserves. Excluding the first tranche of the IMF-SBA facility, the gross official reserves of the country had exceeded US dollars 2.3 billion by August 17.

Supported by the demand management measures taken earlier by the Central Bank, as well as the benign external prices, inflationary pressures in the economy continue to be subdued. Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (2002=100) declined steadily till June 2009, reaching 0.9 percent, but increased marginally to 1.1 percent in July.

As in other parts of the world, in Sri Lanka too, inflation is expected to rise moderately during the second half of the year 2009 along with the base effects stemming from the sharp price increases last year dissipating gradually. Nevertheless, inflation on an year-on-year basis, is expected to remain at single digit levels throughout this year.

Taking these developments into account, the Monetary Board, at its meeting held on August 17, has decided to maintain the policy interest rates of the Central Bank at their existing levels.