Financial Times

Central Bank raises rates to curb inflation
The Central Bank last week tightened its monetary policy, raising its benchmark Repurchase (Repo) and the Reverse Repurchase (Reverse Repo) rates for the first time in one year in an effort to rein in inflation.

The Monetary Board decided to increase the Repo rate and the Reverse Repo rate by 50 basis points to 7.50 per cent and 9.00 per cent, respectively, a Central Bank statement said. These rates had not changed since last October and comes a week before the UPFA government's first budget.

"The acceleration in the monetary aggregates so far in the year indicates the possibility of the onset of demand-fuelled pressure on inflation," the bank said. "The Central Bank is of the view that a tightening of monetary policy is therefore required to curb the build up of inflationary pressure and inflationary expectations in the economy."

Inflation, as measured by the 12-month moving average change of the Colombo Consumers' Price Index, which was on a declining trend since early 2003 and reached its lowest level of 3.7 per cent in April 2004, has risen gradually since then. It increased to 6.1 per cent in October 2004.

Monetary aggregates have expanded at a faster rate than anticipated with broad money supply (M2b) expanding by 18.1 per cent in September mainly driven by the higher than expected growth in credit to both the private sector and the government sector.

The growth in credit to the private sector was around 21 per cent in September 2004 on a point-to-point basis while net credit to the government rose by 28 per cent during the year to September 2004.

The government relied more on domestic sources in financing the budget deficit, and total domestic borrowing amounted to 4.4 per cent of GDP during the first eight months of the year, the Central Bank said.

Total government revenue during the first eight months of the year was 9.6 per cent of GDP, while total expenditure and net lending were 15.2 per cent of GDP. Preliminary estimates up to August 2004 indicate that the overall budget deficit for the first eight months of 2004 is 5.6 per cent of GDP.

"Measures taken by the government are expected to increase the revenue collection and contain expenditure increases in the second half of the year," the bank said. It said overall economic growth for the year is likely to be around 5.0 - 5.5 per cent with growth momentum in tourism, textiles, telecommunications and port services likely to continue during the rest of the year, although the drought and high international oil prices would cause some downside impact.

Back to Business