Sri Lanka central bank says overnight rate volatility and inflation would moderate

June 25, 2007 (LBO) – Sri Lanka's reserve money targeting regime is showing results and volatility in overnight rates and inflation will moderate, Central Bank said Monday, days after short-term treasury yields went up by 30 basis points. The bank no longer operates a full policy rate regime, with the discount window nominally at 12.00 percent, but with access severely curtailed.

It is instead operating a strict quantity targeting framework based on reserve money targets which has seen short term rates shooting to 40 percent in the early stages.

"Market liquidity has remained broadly in balance and volatility in the short-term interest rates, particularly in the interbank call rate, has declined, reaching a stable level," the Central Bank said in its June monetary policy statement.

"These favourable trends are expected to continue further."

Overnight market rates are now just around 12 to 14 percent with excess liquidity being drained at rates under 12 percent. However Treasury bill yields have been edging up with 3-month rates now at 17.4 percent, with the bank not printing money to buy them up.

Economists say this is crucial to keep reserve money and inflation in check.

The central bank said reserve money