The Central Bank (CB) has revised its quarterly targets published in the 'Road Map for Monetary and Financial Sector Policies for 2008 and beyond' to contain the second round effect of the high international commodity prices on future inflation.

In a press release, the CB stated that its strategy has been to keep in check the growth in reserve money through open market operations as well as stringent quantitative restrictions and allowing market interest rates to adjust accordingly to contain demand driven inflationary pressures.

The CB said its reserve money has been well within the revised third quarter target adding that the achievement of the reserve money target in September 2008 follows the successful achievement of the targets set for the first two quarters of the year. Average reserve money during the third quarter was at Rs.280.6 billion (a growth of 9.8 percent) compared with the target of Rs.285.2 billion (a growth of 11.4 percent, year on year).

The press release stated that the impact of the tight monetary policy stance maintained thus far has been evident in the deceleration in the growth of monetary aggregates and the decline in inflation.
The turbulent conditions in global financial markets have led to tighter liquidity and credit conditions the world over, the CB said adding that it has been closely monitoring these developments and observed some sharp movements in interest rates which are not warranted under the present conditions where there is sufficient leeway in the reserve money programme.

Therefore, considering the firm market liquidity levels maintained thus far through the tight monetary policy stance and the current global developments, the CB has decided to ease the conditions pertaining to the provision of the reverse repurchase facility in order to avert any risks that may arise from liquidity constraints. Accordingly, the provision of liquidity by the CB to market participants at the Reverse repurchase rate has been enhanced to six times per calendar month from three, as per existing rules with effect from 2 October 2008.

However, the provision of reverse repurchases at the Reverse repo rate of the CB will continue to be made only when the market is short in liquidity.According to the CB, the move is expected to contain the volatility in money market interest rates. Since the reserve money is well within the targeted level, the CB stated that this measure will not pose any risk to achieving the fourth quarter reserve money target. (NG)