Sri Lanka watching for results from recent tightening: CB Governor

ECONOMYNEXT – Sri Lanka is watching for the effects of monetary policy measure to play out, and a recent spike in inflation could be due to sales taxes, Central Bank Governor Indrajith Coomaraswamy said as inflation continued to climb up.

"We still haven’t seen the full effects of what had been done," he told reporters in Colombo at his first press conference being made Central Bank Governor.

He said the effect of tightening took between 9 to 12 months according to what Deputy Governor Weerasinghe said.

"Some measures have been taken, They seem to be having an effect, So we will keep watch and see."

Inflation could also be spiking due to value added tax, which had to be stripped out, Coomaraswamy said.

Analysts had expected the central bank to wriggle out of a rate hike by pointing to the increase in value added tax. It had in the past also wriggled out out timely rate hikes pointing ‘supply shortfalls’ and ‘external’ factors..

"Core-inflation has been somewhat more stable," he said.

Sri Lanka’s inflation rose to 6.0 percent in June 2016 exceeding the inner bank of an International Monetary Fund program. Meanwhile so-called core-inflation, which in Sri Lanka has more non-traded items, hit 6.4 percent. In the past when core-inflation was lower than headline inflation, the central bank had used it as an excuse to wriggle out of rate hikes, and generated high inflation and currency depreciation in its wake.

The central bank released about 300 billion rupees of liquidity tied up in term repos in over 2015, cut rates in April spooking foreign investors in domestic bonds and printed over 200 billion rupees outright generating a balance of paymetns crisis and busting the rupee from 131 to 147 in sparking the current cycle of monetary instability.

Belatedly it tightned policy by raising rates back to January levels and also raised the reserve ratio, a measure that has been abandoned by most central bank banks.





However over the past two months the central bank had not bought lot of Treasury bills outright to inject excess demand to the economy but has been injecting cash overnight to banks, after defending the peg. Injecting cash overnight puts pressure on banks which are short of cash to raise deposits. (Colombo/July05/2016)

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