Sri Lanka Central Bank maintain interest rates, expects pressure on forex market to reduce

Sri Lanka's Central Bank has decided to maintain current policy interest rates as the Monetary Board of the Bank was of the view that the policy measures implemented earlier this year are sufficient to ease the expansion of both credit and the trade deficit. Following its monthly Monetary Board meeting held Friday,
the Central Bank said its Repurchase rate would remain at 7.75 percent while the Reverse Repurchase rate remains at 9.75 percent. However, the Bank said it will continue to closely monitor monetary and external sector developments and if necessary, take further measures in the months ahead although it expects a deceleration in both monetary aggregates and imports during the course of this year. Sri Lanka has maintained a single-digit inflation rate over the last few years while recording a growth over 8 percent. The year-on-year inflation was 6.1 percent in April 2012 while annual average inflation was 5.7 percent due to the favorable domestic food supplies stabilizing the domestic consumer prices. The Bank expects the outlook for domestic food supplies to remain favorable and the declining oil prices to ease the pressure on the domestic foreign exchange market in the coming months of the year. The decline expected in volumes of imports during the year following the measures taken by the government and the Central Bank earlier this year will also significantly reduce pressure on the domestic foreign exchange, the Bank said. The imports increased substantially during the last year due to the expansion in domestic economic activity and increased the trade deficit higher than expected which led the government and the Central Bank to implement the policy measures. Earlier in the year the government raised fuel prices and the taxes levied on imported vehicles, The Central Bank increased the policy interest rates last month. With respect to monetary developments, market interest rates have moved up gradually, reflecting the tightening of monetary conditions, the Bank said in its review. Meanwhile, banks have been directed to take measures to reduce the growth of loans and advances to a range of 18 - 23 percent.