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Sri Lanka tightens monetary policy

COLOMBO (EconomyNext) – Sri Lanka has effectively tightened monetary policy ending an administrative procedure that kept overnight interest rates below the official 6.50 percent floor of the policy rate corridor.

From March 02, a restriction brought in September 2014 that limited banks from depositing excess cash at the Central Banks standing 6.50 percent window to only three days and the rest at 5.0 percent will be lifted, banks were informed Friday, four days after the official monetary policy statement for February.

The restriction in September brought overnight gilt-backed rate down from about 6.6 percent to as low as 5.2 percent on some days and the unbacked call rate to 5.85 percent on some days from 6.8 percent levels.

The lifting of the restriction will make gilt backed overnight rates back to around 6.5 percent, analysts say.

The ceiling of the policy rate corridor is 8.0 percent but with only partially sterilized legacy excess liquidity dating back from a period of weak or negative credit, the interbank markets are flushed with cash, when term auction mature.

Sri Lanka’s credit growth picked up from around August 2014 and in December 76 billion rupees of loans were disbursed, a historic high, the Central Bank said.

With credit staring to move higher Central Bank is now fencing with the excess cash in forex markets in unsterilized dollar sales and mopping up the excess liquidity with foreign resrves.

Meanwhile a revised January 29 budget hiked state sector salaries and prices of petroleum was also cut, which would pressure credit markets. In February 12-month inflation fell to 0.6 percent, an 11-year low party due to administrative cuts in prices in the budget.

In a separate move, the state raised 10 billion rupees from a 30-year bond at an average of 11.73 percent, with the cut off hovering around 12.5 percent, according to market sources.

 

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