Sri Lanka Central Bank increases reserve requirement, maintains rates

Apr 12, Colombo: Sri Lanka Central Bank’s Monetary Board on Tuesday has decided to maintain policy interest rates but to increase the Statutory Reserve Ratio (SRR), the commercial banks’ deposit requirement by one percent.

Accordingly, the SRR applicable to all rupee deposit liabilities of commercial banks will be 8 percent. The change will be effective from April 29.

The measure has been taken to contain the demand-side inflation.

The repurchase remains at 7.00 percent and the reverse repurchase rate at 8.50 percent.

The Central Bank noted that the broad money growth driven mainly by the increased credit flows to the private sector reflected the acceleration of economic activity and the low base effect.

The monetary authority has expressed concern that the excess liquidity in the domestic money market could further expand monetary aggregates, leading to higher inflation than originally predicted.

“Thus the Monetary Board considers it prudent to pull back any buildup of demand-side pressure on inflation and ensure continued monetary stability,” the Central Bank said in its monthly monetary policy report released Tuesday (12).

Sri Lanka has recorded a growth rate of 8.6 percent for the fourth quarter of 2010 while the economy grew by an impressive 8.0 percent in 2010.

The Bank has noted that the impact of disruptions to the supply of domestic agricultural crops in January and February due to the devastating floods has subsided.

The current paddy harvest in major growing areas combined with the vegetable and fish stocks reaching the market should allay the demand pressures and reduce prices during the this month’s festive season, the Central Bank observed.

Despite the concerns of escalating global fuel and energy prices on domestic economic and price developments, the Central Bank remained hopeful of low impact of the adjustment on inflation.

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