Sri Lanka eases policies, reduces interest rates to boost growth

The Central Bank of Sri Lanka has decided to ease tight monetary policies it imposed earlier this year and reduce the policy interest rates aiming to boost economic growth and arrest the rising inflation, the Central Bank said in its monetary policy review Tuesday. The Monetary Board of the Bank has decided to reduce both rates by 25 basis points while allowing the ceiling on rupee credit extended by banks to expire at the end of 2012. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank will be 7.50 percent and 9.50 percent, respectively, with immediate effect. Early in 2012 the Central Bank and the government adopted strict policy measures to curtail excessive credit growth and the high import demand to contain the trade deficit that was growing along with dwindling reserves since the latter part of 2011. With the implementation of tighter policies the Bank has expected the economic growth to slow down somewhat and the inflation to rise. The projections for economic growth during 2012 have been revised downward to 6.8 percent and inflation increased to 9.5 percent in November from 8.9 percent in the previous month. Inflation has remained near 9 percent in the second half of 2012 as a result of the increases to administered prices and recent tariff adjustments while adverse weather conditions towards the third quarter caused prices, particularly of fresh food items, to remain high, the Bank explained. The Central Bank, based on current projections, expects the inflation to moderate towards the second quarter of 2013 and to stabilize after that due to the management policies introduced at the beginning of this year. During the year expenditure on imports declined faster than the decline in the export earnings narrowing the trade deficit. Accordingly, the trade deficit contracted for the second consecutive month, declining by 1.0 percent in October 2012, and this trend is expected to continue under the current flexible exchange rate regime. Following the introduction of tight measures, a moderation in the money supply has been witnessed, largely on account of the deceleration in credit extended by commercial banks to the private sector. Considering all these positive developments the Monetary Board at its meeting on Monday has decided that there is some space to ease monetary policy while maintaining overall macroeconomic stability. The Monetary Board has also decided that the credit ceiling imposed for 2012 has served its purpose and such a policy measure may not be required in the near future.

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