The government has been heavily borrowing commercial dollars this year and selling to the central bank, which has helped beef up reserves.
The bank's monetary board also announced an emergency rate hike of 50 basis points ahead of the scheduled date in October 13, pushing up its policy rate to 11.125 percent.
The Bank also did not hold the daily open-market auction but chose to inject the entire liquidity requirement through the reactivated standing facility.
Relative Calm
Dealers said call markets were now calm but at least one deal was concluded at 20.0 percent in early trading, with quotes rising as high as 22 percent before the standing facility came on stream.
Call rates then stabilized around 14.
0 percent, but treasury security prices remained sharply down with dealers quoting 14.
0 percent or higher to discount.
A 2-year bond auction which offered one billion rupees was cancelled today.
On Wednesday the public debt department rejected all the bids for the Treasury bill auction.
Sri Lanka central bank has kept policy interest rates low despite rising inflation, which outsiders believe is to keep interest cost of the government low, but it has led to high credit growth, monetary expansion and inflation while also pushing up growth numbers.
Easy Money
Central Bank said today the private sector has also been using the easy money to expand borrowing.
“The Board also observed that inflation has not declined to a satisfactory rate as yet,†the Bank said Thursday.
“Further, the Board witnessed an unusual increase in lending by commercial banks and substantially higher borrowings from the Central Bank through the reverse repurchase window.
Such excessive borrowings have led to added inflationary pressures.â€
Sri Lanka’s 12-month inflation was 15.3 percent in August and even the new policy rates are still lower than inflation.
In addition to driving long-term credit growth, the Central Bank’s easy credit policy also allows exporters to delay bringing in dollars, adding further pressure to the balance of payments.
Reserve Outflow
Analysts point out that the current 12 billion rupee shortfall in the Interbank market, in spite of injections of liquidity through intervention in the primary treasury bill auctions, reflects a sharp net outflow of foreign reserves.
But central bank sought to calm forex markets, saying reserves were at a ‘satisfactory level.
’
“The Monetary Board at its meeting held on 27 September 2006 reviewed economic developments and noted that the Sri Lankan economy is growing at 8.0 per cent and that the external reserves are at a satisfactory level as a result of high export proceeds and inward remittances,†the Bank said.
In the forex market dollars were traded around 103.
70 rupees.