The banking industry is expecting Sri Lanka’s economic policy to remain the same with no major impact on the current performance of the money markets, regardless of the outcome of next week’s presidential election.

One banker told the Business Times that neither President Mahinda Rajapaksa or opposition candidate Sarath Fonseka are promising anything radically different. “I would be surprised to see a change from the status quo with the President or the opposition,” he said.

The banker added that he believes policy rates have bottomed out and is not expecting any more rate cuts in 2010. “We don’t see any rate cuts and if any, only towards the very end of the year in the fourth quarter where there might be some pressure on the Central Bank (CB) to hike interest rates.” However, he added that inflation is the key factor to monitor. “So far, it has been under control. With the base effect coming into play, inflation rates will pick up a little.” He said inflation will most likely remain in single digits by the end of this year but closer to 2010, in line with CB expectations.

The CB announced this week in its latest Monetary Policy Review that a gradual increase in inflation on a year-on-year basis was expected, given the low base and the rebounding of international commodity prices along with the recovery in the global economy. Nevertheless projections of inflation for 2010 indicate benign inflationary pressures, enabling inflation to be in single digits by year end.

Another banker said the money markets are highly liquid with a Rs.20 billion liquidity surplus. “Banks have surplus funds,” he said. “The CB purchases dollars in the market and injects the extra rupees into the market after purchasing dollars,” he explained.

He added that during November and December of 2009, there was a huge increase in liquidity with over Rs.30 billion. “It went down because when the CB offers treasury bills or short term bills; that money is needed to pay off the investors.” He also added that extra liquidity is mopped up by the CB to ward off inflationary pressures.