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Source: www.asiaecon.org |

SRI LANKA LOWERS INTEREST RATES, STABILIZES INFLATION


  To stimulate growth and combat the global recession, Sri Lanka's central bank lowered its overnight lending rate, the first change since February 2007. The Central Bank of Sri Lanka cut the penal interest rate by half a percent from 17 percent and the repurchase rate to 10.25 percent today.


To stimulate growth and combat the global recession, Sri Lanka’s central bank lowered its overnight lending rate, the first change since February 2007. The Central Bank of Sri Lanka cut the penal interest rate by half a percent from 17 percent and the repurchase rate to 10.25 percent today.

 

At Wednesday’s Treasury bill auction, the 3-month yield fell 21 basis points to 15.78 percent, the 6-month rate by just 2 basis points to 16.94 percent and the 12-month rate also by 2 basis points to 17.74 percent.

 

A 4-year bond maturing on 01.04.12 which fell by about 20 basis points to 18.00 percent levels in anticipation of a rate cut, traded at 17.80 percent but was later quoted around 17.85/18.00 percent, dealers said.

 

A 2-year bond maturing on 01.08.10 also fell to around 17.50/75 levels and later recovered to be quoted around 17.92/18.00 percent.

 

The Central Bank said that the new monetary policy introduced by them will result in a clear drop of inflation rate in the country. In addition, they also pointed out that the current collapse in the world economy resulted in less demand for every essential item in the world market. As a result of this situation, the prices have declined sharply.

 

The Central Bank stated, “Inflation has been on a path of rapid deceleration, benefiting from the absence of upward pressures from international commodity prices and supported by the tight demand management policies put in place by the central bank.”

 

Danushka Samarasinghe, research manager at Asia Securities Co., said, “The retreating inflation will enable monetary authorities to gradually reduce the penal rate”.

 

To further spark economic growth, Sri Lanka revealed a 16 billion rupees ($140 million) stimulus package that includes cutting retail fuel prices and removing some taxes in December. As the government adds stimulus measures and prospects of investments, the nation’s economy may expand faster than previously estimated in 2009. Growth may be 6 percent this year, a percent higher than earlier forecasts.

 

Since the plunge of oil and other commodity prices due to the economic slump, the Central Bank was able to use more of an expansionary monetary tactic. The Central Bank has kept the rates unchanged since February 2007 in favor of a reserve money targeting method to control the money supply and curb inflation that was among the highest in Asia due to high oil prices and high government expenditures in the past. Now that inflationary pressures are beginning to ease, the Central Bank is able to ease their grip on the money supply.

 

In a statement today, the Central Bank said, “it is expected that inflation will fall to a single digit in February and continue its decline in the coming months”. The Central Bank added, “these interest rate reductions will lead to significant reduction in the cost of borrowing, resulting in economic activity being stimulated.”

 

The Central Bank believes that through monetary policy and falling demand, the inflation rate in Sri Lanka would drop to less than 10 points by next month.

 

 

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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