Policy rates remain unchanged:

Price pressure to ease

Inflation remains broadly stable:

The Central Bank says any price pressure in 2011, will ease with the recently implemented fiscal measures with the availability of stocked-up paddy and the possibility of the increase in the extent of cultivation during the yala season.

The Central Bank

Inflation, as measured by the change in the Colombo Consumers’ Price Index (Base=2002), has remained broadly stable in January 2011. Year-on-year inflation was 6.8 percent in January compared to 6.9 percent in the previous month, while annual average inflation reached 6 percent in January from 5.9 percent in the previous month, the Central Bank Monetary Policy Review for February 2011 said.

As in the previous months, the marginal increase in the index was largely driven by the food and non-alcoholic beverages category. The increase in the price of food items during the month could be attributed to the adverse weather conditions.

While the paddy output is expected to be affected due to recent floods, the availability of stocked-up paddy and the possibility of the increase in the extent of cultivation during the yala season are likely to ease any price pressures in 2011.

The recent price surges in other food crops are expected to subside as the situation normalises in the coming months.

The global economy is set to recover faster in 2011 than previously expected. While the recovery is likely to improve earnings from exports further, the impact of the global recovery on the demand for key commodities could have an impact on prices.

Appropriate measures will continue to be taken to contain the effect of any such developments. Certain recently implemented fiscal measures, such as the duty waiver granted for customs import duty on petrol and the reduction in taxes on importation of milk powder, would reduce the upward price pressures arising from adverse international commodity prices.

Overall, the expected improvements in the fiscal sector are likely to ease pressure on domestic prices in the medium term.

Sri Lanka’s official reserves strengthened further as the International Monetary Fund last week completed its review of the country’s economic performance approving immediate disbursement of the sixth tranche under the ongoing Stand-by Arrangement.

Accordingly, total disbursements under the arrangement so far amounts to around US dollars 1.516 billion.

Provisional data up to end 2010 indicates that year-on-year growth in broad money is in line with expected money growth.

The high growth momentum in credit to private sector continues and the Central Bank will continue to monitor these developments closely.

While short-term interest rates have responded positively to the reduction of policy interest rates in January 2011, which was aimed at further encouraging substantial and sustained private sector participation in economic activity, lending rates of many banks are yet to adjust fully.

Taking into consideration the above developments, the Monetary Board has decided that the current monetary policy stance is appropriate.

Accordingly, the policy interest rates of the Central Bank will be maintained at their current levels, i.e., the Repurchase rate at 7.00 percent and the Reverse Repurchase rate at 8.50 percent.