Monetary Board reduces Reverse Repurchase rate

The Monetary Board, at its meeting held on August 19, 2010, has decided to reduce the Reverse Repurchase rate by 50 basis points with immediate effect, while keeping the Repurchase rate unchanged. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would be 7.25 percent and 9.00 percent, respectively, a Central Bank release states.

Considering the improving outlook for inflation, the Central Bank commenced easing its monetary policy stance in 2009 in order to stimulate economic activity.

While inflationary pressures in the domestic economy have continued to be benign in the recent months, enhanced prospects for domestic agricultural produce have further improved the outlook for inflation. In addition, broad money (M2b) has decelerated in the recent months while macroeconomic conditions have remained stable.

Market interest rates have adjusted downwards, although at a slower pace, in response to the easing of the monetary policy stance. Yield rates on government securities in the primary market have declined during the recent months while the prevailing positive outlook for the economy has also made possible, the issue of Treasury bonds with maturities of up to ten years. Other market interest rates have also declined, although certain lending rates are yet to show a full adjustment.

In line with improving economic prospects and the gradual easing of credit conditions, year-on-year growth in credit obtained by the private sector, which turned positive in March this year, increased to 6.2 percent by June 2010.

Meanwhile, the risk of macroeconomic variables moving in an undesirable direction has now substantially abated. The benefits of the improving macroeconomic structure would also be raise the potential of the domestic economy to grow, and such potential should now be provided the space to materialise. The current developments also call for a reduction in the risk premia incorporated in lending rates of financial institutions, thus lending to the intermediation gap between lending and borrowing rates of the banks reducing further.

Accordingly, it is expected that domestic credit conditions would continue to ease in line with the Central Bank's policy direction, thereby strongly supporting the revival in economic activity currently underway.

The Central Bank expects credit flows to the private sector to gather momentum during the remaining months of the year, alongside the anticipated pick-up in economic activity. At the same time, the expected expansion in credit would serve to reduce the excess liquidity, which has built up in the money market over the past several quarters.

The release of the next regular statement on monetary policy will be on September 15, 2010.