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Sri Lanka keeps rates unchanged amid lower inflation

COLOMBO (EconomyNext) – Sri Lanka kept policy rates unchanged amid stronger as inflation remained low, the Central Bank said, despite heavy recent state borrowings from the banking system.

In the 12-months to December 2014 consumer inflation was only 2.1 percent the Central Bank said in its monetary policy review for January and cuts in taxes of fuel this month and other planned cuts will also reduce consumer prices.

"While low inflation is mainly attributable to contained demand pressure in the economy, it was also supported by favourable supply side developments, particularly the downward revisions in domestic energy prices in the last few months of 2014," the central bank said.

"Subdued demand pressure and inflation expectations in the economy, the favourable impact of further reductions in fuel prices in January 2015, and the expected reduction of administered prices of other key commodities announced in the Government’s ‘100-Day Programme’ are expected to reduce inflation further in the months ahead.

However there has been concerns about heavy borrowings by the state and state enterprises in the last quarter of 2014 with fears that such borrowings will become worse with the tax cuts.

Cutting fuel taxes will also directly add to consumer spending power.

The Central Bank said the its policy standing deposit facility which takes in overnight excess liquidity will remain unchanged at 6.50 percent and the cash injection rate will also remain at 8.00 percent.

Restrictions on the excess liquidity facility will also remain.