Inflation down, falling trends seen for rest of 2007

Inflation eased to 13.7 per cent in May from 16.3 per cent in April and these falling trends are expected to continue during the rest of the year, the Central Bank said this week.

In a statement on monetary policy for June, the Bank said improvements in the external and monetary sectors of the economy, continued. In the external front, exports during the first four months of the year increased by 11.5 per cent, supported by the strong performance of the agriculture exports, led by tea and industrial exports. Cumulative imports for the first four months grew at a relatively lower rate of 7.4 per cent.

The resulting trade deficit declined compared with the same period in 2006. These developments, further strengthened by the 17.4 per cent increase in private remittances and inflows on Treasury bond sales to non-residents by the government, resulted in an estimated Balance of Payments surplus of US$ 250 million by end May, the Bank said.

Within the monetary sector, reserve money, which is the operational target of the monetary policy, was maintained within the targeted level thus far in 2007 and it is poised to be well within the second quarter target as well. Also, a gradual decline was observed in the expansion of the broad money supply, which recorded a 16.8 per cent growth in April 2007.

This was supported by a decline in net credit to the government by the banking sector. However, credit to the private sector continued to grow at a higher rate. Market liquidity has remained broadly in balance and volatility in the short-term interest rates, particularly in the interbank call rate, has declined, reaching a stable level.

These favourable trends are expected to continue further, the Bank added. “The impact of the tight monetary policy stance pursued by the Central Bank since end 2004 and the resulting deceleration in the growth of monetary aggregates is evident in the declining trend in inflation during the recent months,” it said.