Sri Lanka policy rates steady, market rates up

Jan 11, 2012 (LBO) - Sri Lanka's main policy interest rate at which cash is injected to the market will remain at 8.50 percent but an increase in market rates could help reduce money supply growth, the Central Bank said as it battles pressure on a dollar peg. Sri Lanka's peg with the US dollar was pressured from the second half of 2011 due to high credit growth, which was financed with excess reserves which accumulated during a period of low credit expansion.
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The central bank in it January monetary policy statement said broad money grew (M2b) grew 20.6 percent in November, though market rates moved up over the past few months.
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Rates moved up due to liquidity shortages coming from the defence of a dollar peg.

Sales of dollars by the Central Bank results in an equivalent reduction in rupee liquidity, and to keep rates from spiking immediately the Central Bank injects fresh liquidity by printing money to 'sterilize the interventions."

Despite the sterilizations one year Treasury bill yields rose 175 basis points, the average weighted prime lending rate (AWPR) increased by around 120 basis points in 2011 and the average weighted deposit rate (AWDR) rose 100 basis points, the Central Bank said.

Analysts say higher deposit rates will help