Policy rates remain unchanged

The Central Bank decided to keep the policy rates unchanged despite the increase in inflation.

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002), which remained between five to seven percent during the period since July 2010, increased to 7.8 percent in February 2011.

The annual average inflation has increased marginally from 6.0 percent in January to 6.1 percent in February 2011.

This anticipated increase was due to the increase in prices of food items, especially vegetables, following short-term supply disruptions caused by floods in major food producing areas.

While relatively large stocks of many varieties of vegetables have started reaching the market since the last week of February from areas where crop damages were insignificant, the supply from affected areas is also expected to improve towards April and May.

The Central Bank

The impact on rice prices is also likely to remain low during the year with stocks being released to the market and the expected increase in the extent of cultivation during the Yala season, resulting in higher output. Continuous increase in the prices of key international commodities, particularly that of crude oil, remains a concern.

The recent geo-political disturbances in some Middle-Eastern countries have pushed global crude oil prices over the levels previously projected by international agencies.

The possible impact of these external price pressures on macroeconomic stability is closely monitored and appropriate measures will be taken if clear signs of persistence of these adverse developments emerge.

The external sector performance in 2010 has been favourable. The cumulative earnings from exports recorded a historic high, while expenditure on imports has also rebounded. Increased worker remittances and earnings from tourism as well as high inflows to the financial account resulted in a surplus in the overall balance of payments in 2010.

The gross official reserves continue to remain high above US dollars six billion. So far during the year, the rupee has appreciated marginally against the US dollar.

Broadmoney recorded a year-on-year growth of 15.8 percent in December, while the increase in credit granted to the private sector was 25.1 percent on a year-on-year basis partly due to a lower base.

The average growth of broadmoney during 2010 was 15.3 percent, which was broadly in line with the monetary program.

Market interest rates have remained broadly stable so far during the year.

The Central Bank will continue to monitor the high growth in credit to the private sector and overall trends in monetary aggregates.

The Monetary Board has decided to maintain the policy interest rates of the Central Bank at their current levels.

Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would remain at 7.00 percent and 8.50 percent, respectively.