would enable you to enjoy an array of other services such as Member Rankings, User Groups, Own Posts & Profile, Exclusive Research, Live Chat Box etc.. 
Home
The Central Bank has decided to keep key interest rates steady with expectations that credit growth would dampen as the global economy weakens. It said the trade balance was expanding but pressure on the balance of payments would be mitigated by improvements in foreign currency inflows.
The exchange rate has been maintained at Rs. 113.89/90 to a dollar in the face of severe import demand with the Central Bank selling dollars. This has put pressure on domestic interest rates in recent weeks but the Central Bank has kept the repurchase rate (overnight deposits of the banking system with Central Bank and reverse repurchase rate (overnight borrowings of the banking system from the Central Bank) steady at 7 percent and 8.5 percent respectively based on an optimistic forecasts for the short term.
Dealers said the balance of payments has come under pressure as well because the growing demand for credit was also in part responsible for fuelling the severe import demand. Selling dollars on a sustained basis would erode reserves but a senior official of the Central Bank says these sales were done only because the bank believed the nature of the current problem was temporary.
Releasing its Monetary Policy Review for December 2012 the Central Bank said, "Inflation was seen moderating over the second half of this year. Following a further decline in the year-on-year inflation measured in terms of the CCPI (2006/07=100) to 4.7 per cent, annual average inflation was 6.9 per cent by November 2011.
"Year-on-year core inflation meanwhile was 4.9 per cent by November 2011, while on an annual average basis, core inflation was 7.2 per cent. While supply side improvements, particularly with respect to agricultural produce, have helped bring down domestic prices, the expected favourable performance of the domestic agricultural sector in the forthcoming year, coupled with the ongoing improvements to infrastructure including transportation, will help mute inflationary pressures in the period ahead," the bank said.
"In the global economy, sovereign debt related issues in several advanced economies have led to uncertainty in financial markets and volatility in international commodity prices.
"Meanwhile, oil prices continue to remain high with some volatility due to supply constraints following recent geo-political tensions and perceived risks to supplies.
"Reflecting the impact of these developments as well as import demand associated with the robust expansion of domestic economic activity, the deficit in the trade balance of the balance of payments was seen widening over 2011. Nevertheless, the following circumstances are expected to help cushion the balance of payments in 2011:
(a) Continued increases in inflows to the services account, particularly with respect to tourism;
(b) Higher inward remittances;
(c) Inflows to the financial account including long-term debt obtained by the government in relation to development projects;
(d) Foreign direct investment, which is estimated to have exceeded the targeted level of USD 1 bn in 2011;
(e) Inflows to commercial banks which would help strengthen their capital base, and
(f) Inflows on account of short-term financing obtained by commercial banks. Going forward, banks are also likely to secure more funds from abroad as Tier II capital of banks could potentially increase by a further USD 1 billion.
"With respect to monetary developments, broad money (M2b) growth was seen moderating in October 2011 to 19.8 per cent, along with a deceleration in the growth of credit obtained by the private sector.
"This trend is expected to continue in the months ahead as the increases in domestic market interest rates seen in recent weeks as well as the widely expected slowing down of the global economy are likely to have a dampening effect on credit growth and therefore monetary expansion.
"Having taken into consideration the recent macroeconomic developments including those discussed above, the Monetary Board decided to maintain the Bank’s policy interest rates at their current levels. Accordingly, the Bank’s Repurchase rate remains at 7.00 percent while its Reverse Repurchase rate remains at 8.50 percent," the Central Bank said.
Dealers said the country would have to make a difficult choice if the expected inflows did not materialise.
"The optimism of the Central Bank is important for the market to hear but if the inflows do not materialise as the bank says it would, then a choice would have to be made sooner rather than later, will it be interest rates or the exchange rate is something we would have to wait and see," a dealer said.
Another dealer said the increase in interest rates of recent Treasury bill auctions was indication that the Central Bank was at the moment more concerned about the exchange rate and was comfortable to allow slight increases to interest rates.http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=41463
The exchange rate has been maintained at Rs. 113.89/90 to a dollar in the face of severe import demand with the Central Bank selling dollars. This has put pressure on domestic interest rates in recent weeks but the Central Bank has kept the repurchase rate (overnight deposits of the banking system with Central Bank and reverse repurchase rate (overnight borrowings of the banking system from the Central Bank) steady at 7 percent and 8.5 percent respectively based on an optimistic forecasts for the short term.
Dealers said the balance of payments has come under pressure as well because the growing demand for credit was also in part responsible for fuelling the severe import demand. Selling dollars on a sustained basis would erode reserves but a senior official of the Central Bank says these sales were done only because the bank believed the nature of the current problem was temporary.
Releasing its Monetary Policy Review for December 2012 the Central Bank said, "Inflation was seen moderating over the second half of this year. Following a further decline in the year-on-year inflation measured in terms of the CCPI (2006/07=100) to 4.7 per cent, annual average inflation was 6.9 per cent by November 2011.
"Year-on-year core inflation meanwhile was 4.9 per cent by November 2011, while on an annual average basis, core inflation was 7.2 per cent. While supply side improvements, particularly with respect to agricultural produce, have helped bring down domestic prices, the expected favourable performance of the domestic agricultural sector in the forthcoming year, coupled with the ongoing improvements to infrastructure including transportation, will help mute inflationary pressures in the period ahead," the bank said.
"In the global economy, sovereign debt related issues in several advanced economies have led to uncertainty in financial markets and volatility in international commodity prices.
"Meanwhile, oil prices continue to remain high with some volatility due to supply constraints following recent geo-political tensions and perceived risks to supplies.
"Reflecting the impact of these developments as well as import demand associated with the robust expansion of domestic economic activity, the deficit in the trade balance of the balance of payments was seen widening over 2011. Nevertheless, the following circumstances are expected to help cushion the balance of payments in 2011:
(a) Continued increases in inflows to the services account, particularly with respect to tourism;
(b) Higher inward remittances;
(c) Inflows to the financial account including long-term debt obtained by the government in relation to development projects;
(d) Foreign direct investment, which is estimated to have exceeded the targeted level of USD 1 bn in 2011;
(e) Inflows to commercial banks which would help strengthen their capital base, and
(f) Inflows on account of short-term financing obtained by commercial banks. Going forward, banks are also likely to secure more funds from abroad as Tier II capital of banks could potentially increase by a further USD 1 billion.
"With respect to monetary developments, broad money (M2b) growth was seen moderating in October 2011 to 19.8 per cent, along with a deceleration in the growth of credit obtained by the private sector.
"This trend is expected to continue in the months ahead as the increases in domestic market interest rates seen in recent weeks as well as the widely expected slowing down of the global economy are likely to have a dampening effect on credit growth and therefore monetary expansion.
"Having taken into consideration the recent macroeconomic developments including those discussed above, the Monetary Board decided to maintain the Bank’s policy interest rates at their current levels. Accordingly, the Bank’s Repurchase rate remains at 7.00 percent while its Reverse Repurchase rate remains at 8.50 percent," the Central Bank said.
Dealers said the country would have to make a difficult choice if the expected inflows did not materialise.
"The optimism of the Central Bank is important for the market to hear but if the inflows do not materialise as the bank says it would, then a choice would have to be made sooner rather than later, will it be interest rates or the exchange rate is something we would have to wait and see," a dealer said.
Another dealer said the increase in interest rates of recent Treasury bill auctions was indication that the Central Bank was at the moment more concerned about the exchange rate and was comfortable to allow slight increases to interest rates.http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=41463
