Central Bank of Sri Lanka

May 20, 2016

A 50-basis point hike in the lending and borrowing rates three months ago to 8.0% and 6.5% had been characterized by monetary officials as a pre-emptive move:  “Excessive growth of broad money fuelled by domestic credit expansion in the midst of continued upward trend in underlying inflation requires pre-emptive policy measures in order to contain further build-up of demand driven inflationary pressures.”  At the three subsequent monthly meetings, those levels were deemed appropriate, and today’s statement from the Board, unlike the one after its April meeting, no longer said that the higher interest rates and reserve requirement had not had enough time to be reflected in money and inflation trends.  Instead, officials note now that “Reflecting the gradual transmission of increased short term interest rates to broader market interest rates, the expansion of monetary and credit aggregates is expected to moderate from the second quarter of the year.”  The statement notes that while headline inflation rose in April, core inflation remained at March’s pace.

The lending and borrowing rate hikes engineered in February represented a trend reversal.  Four cuts, each of 50 basis points, had been implemented previously between October 2012 and April 2015.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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