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Sri Lanka clamps down on overnight rates

ECONOMYNEXT – Sri Lanka’s authorities have clamped down on the overnight interbank money market ordering deals made at the highest rates to be reversed, market participants said.
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On Wednesday overnight money traded as high as 6.75 percent, but the deals were ordered to be made at a maximum of 6.55 percent, market participants said.
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Sri Lanka has an overnight policy corridor of 6.00 to 7.50 percent, indicating that rates should have moved up to 7.50 percent, after excess liquidity went out of the system amid currency defence.
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But the central bank has printed money at rates than 7.50 percent to keep manipulate interest rates pressure the currency and precipitate balance of payments trouble and also fired a boom in car loans.
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Some analysts are expecting the next boom is expected in property.
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The central bank raised the statutory reserve ratio effective from January 16, which will allow it to print more money and take it back at no cost to itself but through an implicit tax on the banking system by pushing up intermediation costs and making it more inefficient.
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About 50 billion rupees may go out of the banking system from the SRR hike.
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On Thursday gilt backed repos were quoted around 6.35/40 percent and money 6.40 percent, dealers said. (Colombo/Jan07/2015).

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