Financial Times

The Monetary Board of the Central Bank last week raised the Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate by 12.5 basis points to 9.125 percent and 10.625 percent, respectively to curb rising costs after the 12-month moving average of inflation increased to 10.1 per cent in June.

The Central Bank said in a statement that it was gradually tightening its monetary policy since November 2004 to contain inflationary pressures in the economy, by raising its policy interest rates and conducting aggressive open market operations with the last policy adjustment taking place in June 2006.

It said since inflation has been mostly a result of the demand pressure in the economy, the Monetary Board decided to further tighten the monetary policy to subdue the demand pressure, and to continue with aggressive open market operations.

In the first quarter of 2006, the economy grew at a healthy rate of 8.1 percent in comparison to the first quarter of 2005 with available indicators showing the growth momentum will continue across all major sectors.

The Agriculture sector is expected to grow benefiting from favourable weather conditions. Paddy production increased by 6.1 per cent in Maha 2005/06, surpassing the record high paddy output experienced in Maha 2004/05. A promising performance is also expected in Yala 2006 paddy production. Tea output is expected to grow moderately, while rubber and coconut production would record a higher growth.

The statement said that expansion in international trade continues in 2006, benefiting from the sustained external demand and domestic demand. Cumulative exports grew by 5.8 per cent during the first five months of 2006, reflecting higher growth in exports of rubber based products, textiles and garments, and food and beverages. Cumulative imports grew by 21 per cent during this period, largely due to increased expenditure on intermediate goods and investment goods. The growth in intermediate goods arose mainly from petroleum imports. Widened trade deficit was offset by the increased foreign currency inflows to the country through private remittances, which grew at 26 per cent, and net inflows to the government. Accordingly, the balance of payments (BOP) recorded a surplus of $207 million by end June 2006 and the official reserves excluding the liabilities to the Asian Clearing Union have increased to $2.5 billion by end June 2006. The rise in fuel prices however remains a concern in overall macroeconomic management, the Bank said.