Financial Times

No change in monetary policy - Central Bank

The Central Bank last week announced it would maintain its current monetary policy stance, saying economic performance was in line with projected targets with inflation and interest rates on the decline and the rupee stable.

"Monetary expansion has been in line with projections, while the level of reserve money has been within the targets set in the monetary programme," the bank said in its monthly police statement.

"Interest rates have gradually declined during the first five months of 2003. The Central Bank has reduced its policy rates by a total of 150 basis points in this period. This, together with the availability of liquidity in the market and cautious borrowing by the government, has supported the decline in interest rates."

Market expectations, as reflected in bid yields on government securities and in the forward premia for foreign exchange transactions, also reflect a reduction in inflationary expectations, it said.

The recent floods are likely to have some downward impact on projected 2003 economic growth although initial assessments indicate that this would be marginal, it said.

The floods are likely to have some "dampening effect" on the output of tea, rubber and paddy in the second and third quarters, but a recovery is expected in the latter part of the third quarter and in the fourth quarter.

Government revenue has been slightly higher than projected, according to provisional data up to March. Total government expenditure has also exceeded projections due to higher expenditure on the public investment programme, the Central Bank said.

The rupee depreciated against the US dollar only by 0.5 per cent in the first five months of 2003 but declining domestic inflation has enabled Sri Lanka to maintain its international trade competitiveness, it said.

"Continuing increases in foreign remittances and capital inflows, including inflows to the stock market, have ensured liquidity in the foreign exchange market, despite an increase in the trade deficit."