Sri Lanka central bank says policy tight, credit to govt. at record low

Feb 21, 2008 (LBO) – Sri Lanka's money supply growth is slowing and credit to government was at a record low of 17 billion rupees, the Central Bank said in its monetary policy statement in January, promising tight policy ahead. The statement made no mention of policy rates, with the monetary authority no longer targeting a short-term rate after it shifted to money supply control from rate targeting last year.

The bank now runs a floor discount rate of 12.00 percent and a ceiling of 19.00 percent but due to discount window restrictions the overnight rate sometimes moves above the band.

"The Central Bank has been vigilantly monitoring the developments in the market interest rates, noting the high and volatile nature of these rates and its implications on the smooth functioning of the market," the monetary authority said Thursday.

"The Bank will continue to conduct its Open Market Operations to maintain reserve money within the targets while managing market liquidity without permitting excessive volatility in short term interest rates."

Economic analysts say that short term rate volatility is a consequence of money supply targeting and most of the larger commercial banks have now become more disciplined.