Financial Times

Central Bank raises interest rates to further reduce inflation
The Central Bank last week tightened monetary policy by jacking up benchmark interest rates, as money supply growth continued to remain above desire levels, in an effort to further reduce inflation and achieve the price stability required to sustain econmic growth.

The Central Bank said the Monetary Board increased the Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate by 25 basis points to 8.75 per cent and 10.25 per cent, respectively, with effect from December 22, 2005.

It also decided to continue with aggressive open market operations, the bank said in a statement.

“A deceleration in monetary expansion and a further containment of inflation and inflation expectations are expected with these measures.

Financial institutions are expected to raise the deposit rates immediately thereby strengthening the effectiveness of these policy measures.”
Inflation has moderated since February due to improved supply conditions and the monetary policy measures taken, the bank said.

Inflation as measured by the point-to-point change in the Colombo Consumers' Price Index (CCPI) declined further to 9.1 per cent at end November 2005 from 10.4 per cent at end October.

Similarly, the annual average inflation also declined to 12.1 per cent in November from 12.5 per cent in October 2005.
“The current adjustment of the policy rates will help bring down inflation further and attain price stability eventually, which is necessary for sustaining the growth momentum and the favourable external sector developments,” the Central Bank said.

The growth in reserve money on a point-to-point basis declined to 16.5 per cent in November 2005 from 18.2 per cent in October 2005 but it is still above the targeted growth.

The growth in broad money also continued to remain high at around 19 - 21 per cent as a result of increases in both credit to the private and public sectors.

The Central Bank said that considering the higher expansion in monetary aggregates, it had adopted a series of monetary policy measures this year, including raising policy interest rates and conducting open market operations more aggressively.

“These policy measures were instrumental in dampening the excessive growth in money supply, through appropriate changes in lending and deposit rates.”
The bank said the growth momentum in economic activity continued in 2005 with services and industrial sectors providing the impetus for continued growth.

The agricultural sector recovered with a strong improvement in paddy production as well as an increase in the production of plantation and subsidiary food crops.

“The adverse impact of the tsunami disaster on the economic activities in some sub-sectors of the economy is dissipating gradually,” the statement said.

“The growth momentum in the economy is expected to continue in 2006 as well with the continuation of the improved performance in all the key sectors.”
Exports increased by 10.4 per cent during the first ten months of 2005 while imports grew by 14.4 per cent, mainly due to the increased expenditure on petroleum imports, which grew by 45 per cent over the previous year.
Inflows to the country improved with private remittances increasing by 20 per cent during the first ten months.

The balance of payments recorded a surplus of around US$ 400 million at the end of November 2005 as a result of the higher financial flows to the government. The gross official reserves of the Central Bank increased to US$ 2.6 billion (3.5 months of imports) at end October, from US$ 2.2 billion (3.3 months of imports) at end December 2004. The next regular statement on monetary policy is scheduled for January 17, 2006.

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