Jan. 17 (LBO) -- Sri Lanka's Central Bank Tuesday left its benchmark interest rates unchanged at current levels as it expects the previous month's rate hike to slowdown money supply growth. The bank said in a statement that it would leave its overnight repurchase rate at 8.75 percent and the reverse repurchase rate at 10.
25 percent.
The repurchase rate is the return on cash deposited by commercial banks with the Central Bank and the reverse repurchase rate is the cost of borrowing from the Central Bank.
The bank said its four increases of policy rates in 2005 by a total of 125 basis points was expected to curb 'excessive growth in money supply' and put the break on public and private sector credit growth.
Last month, the bank hiked both its repurchase rate and reverse repurchase rate by 25 basis points, citing concerns about an increase in broad money growth due to expansion in private sector credit.
Both benchmark rates were also raised by 25 basis points in September, 50 basis points in June and 25 basis points in May.
"These policy measures taken by the Central Bank were instrumental in containing the excessive growth in money supply," the statement said.
However, money supply growth remains high, fueled by credit expansion and improving foreign reserves.
Broad money, which grew at around 20.0 percent as a result of the higher expansion in credit to the private and public sectors, is also expected to decelerate, reflecting the effects of monetary policy measures taken, the bank said.
Investors were not surprised by Tuesday's announcement as the bank continues to maintain that inflation will 'be moderate' this year.
Sri Lanka's inflation rate fell in December for the fourth successive month to 11.6 percent from 12.8 percent in August (and 12.1 percent in November), partly due to government delaying passing on rising energy costs.
Last year, most Central Bank's in Asian countries like India, Indonesia, Thailand and the Philippines hiked policy rates to tame energy-cost fueled inflation.
However, the bank says: "The annual average inflation is expected to remain at moderately low rates in 2006."
The government has maintained that it expects inflation to ease off to around eight percent this year from a high of 10 percent in 2005.
Analysts say inflation in the tropical island, torn by ethnic conflict and with the coastline devastated by last December's tsunami, has been fuelled by an expansionary fiscal policy in 2004 and not enough tightening of monetary policy in the face of capital inflows in 2005.
The prospect of higher retail fuel price linked inflation also looms amidst rising global crude oil prices.
Also of concern to investors and the Central Bank is the 2006 federal budget by President Mahinda Rajapakse that increased subsidies for farmers.
Rajapakse, who is also the country's finance minister, incorporated spending promises made during his election campaign, by raising welfare benefits and fertiliser subsidies under a revised 2006 budget released earlier this month.
He said the budget deficit will widen to 9.
1 percent of gross domestic product in 2006, from a forecast of 8.
5 percent of GDP 2005.
The bank's next monetary policy announcement is due on Thursday February 16.
Please click to read full text of Central Bank's monetary policy announcement
-Mel Gunasekera: mel@vanguardlk.com