CB reduces Repurchase and Reverse Repurchase rates

The Monetary Board at its meeting held on Tuesday has decided to reduce the Repurchase rate by 50 basis points and the Reverse Repurchase rate by 75 basis points with immediate effect.

Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would be 7.50 percent and 9.75 percent, a media release from the Central Bank said.

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002), has remained around one percent thus far during the second half of the year. According to current projections, although inflation is expected to rise moderately in 2010 due to the gradual decline of the base effect of low inflation in 2009, it is expected to remain relatively subdued.

Benign inflation has enabled the Central Bank to gradually relax its monetary policy stance on several occasions to support economic activity.

Accordingly in 2009, the Central Bank lowered its policy interest rates in several steps, abolished the penal rate as well as lifted the restrictions on access to repurchase and reverse repurchase standing facilities. Market interest rates have declined in response to these measures, albeit with a time lag.

Benchmark yield rates on Treasury bills of all maturities have declined by 960-969 basis points, with 91-day, 182-day and 364- day maturities declining to 7.73 percent, 8.80 percent and 9.56 percent at the auction held on November 11.

Commercial bank lending rates have also started to decline sharply with the reduction of interest rates by the State banks.

At the same time, the significant absorption of foreign exchange by the Central Bank has led to a high level of excess rupee liquidity in the domestic market.

With the retirement of a significant proportion of the Central Bank’s holdings of government securities in August this year, the Central Bank has resorted to issuing Central Bank securities since last month and foreign exchange SWAPs since this month to absorb the excess rupee liquidity in the domestic market.

Through these measures, the Central Bank will continue to manage the excess liquidity situation in the domestic market and take appropriate measures to reduce the level of excess liquidity to a more desirable level, the release said.