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Sri Lanka wards off pressure to hike interest rates, for now

[Hindu, Wednesday, 11 January 2012 08:22 No Comment]

Banking on the “structural changes” in the economy to “provide the momentum for the economy to grow by about 8 per cent in 2012, even in the midst of the slowdown in global economic activity,” the Sri Lankan Central Bank’s January Monetary Board, in its meeting on January 10, decided not to touch any of the interest rates.

“The Monetary Board is of the view that the present policy framework does not require any adjustment and accordingly, at its meeting held on 10th January 2012, decided to maintain the Bank’s policy interest rates unchanged at their current levels, i.e., the Repurchase rate at 7.00 per cent and the Reverse Repurchase rate at 8.50 per cent,” it said in a statement issued here.

The Monetary Board, however noted that, the market interest rates had moved upwards in recent months, in line with changing liquidity conditions in the domestic money market. “As a result, the benchmark yield on one year Treasury bills recorded an increase of around 175 basis points in 2011, while the average weighted deposit rate recorded an increase of about 100 basis points. Meanwhile, the average weighted prime lending rate increased by around 120 basis points in 2011, although at the last auction, the weighted average yields on Treasury bills in the primary market remained unchanged, indicating some stabilisation in market conditions. These moderate upward movements in interest rates are likely to exert a restraining effect on monetary aggregates, which would, in turn, help to curb the build up of demand pressures,” it added.

But there is too much happening in the Sri Lankan economy and beyond, and there will be all-round pressure to increase rates and devalue currency, dealers and analysts said. A combination of stronger than expected credit growth in Sri Lanka, steadily increasing inter-bank rates, rising oil prices in Asia, and the volatile nature of the global economy is pulling down the Sri Lankan rupee.

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