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Sept 18, 2012 (LBO) - Sri Lanka's Central Bank kept its key policy rate at which money is injected to the economy at 9.75 percent saying credit was slowing and balance of payments pressure and inflation was easing.
The central bank said average monthly bank credit volumes had fallen to about 27 billion rupees from April to July compared to 52 billion rupees in the first quarter of 2012.
The central bank said credit volumes were now good enough to keep the economy ticking with the economy estimated to have grown 7.2 percent in the first half of 2012.
Analysts have pointed out that loan growth sky rocketed from the third quarter of 2011 because the monetary authority injected large volumes of central bank credit (printed money) in to the banking system to sterilize or offset liquidity shortages stemming from foreign exchange sales.
The injected money pushed credit volumes above the money raised by banks through deposits and loan repayments, with the resulting demand generating what is commonly known as a 'balance of payments crisis'.
The rupee was gradually floated from February 2012 and sterilized foreign exchange sales ended. The rupee has since failed to appreciate significantly due to unsterilized purchases of foreign exchange by the Central Bank.
The central bank said the credit volumes were enough to keep "reasonably robust economic activity" with the first half of 2012 seeing growth of 7.2 percent.
Sri Lanka is recording positive growth at a time when key economies are shrinking.
In the 12 months to July inflation shown by a consumer price index that measures prices in Colombo rose 9.8 percent after the rupee depreciated around 17 percent.
The Central Bank says inflation has begun to moderate with the index showing 9.5 percent in July and annual inflation is expected to remain within single digits.
"Going forward, demand management policies adopted by the authorities are expected to help contain inflation within single digit levels," the Central Bank said in its September monetary policy review.
In Sri Lanka inflation has always fallen after previous balance of payments crises, as bank credit shrank to levels below new deposits and repayments made by previous customers as long as the state borrowings have been kept in check.
Sri Lanka has a so-called soft-pegged monetary system devised soon after the Second World War by US interventionists. The monetary experiment collapsed spectacularly in the 1971-73 period, plunging the world into an oil shock and high inflation.
But countries like Sri Lanka have persisted with such systems.
Such systems, where an inflation floor is set by the anchor central bank to which the money is pegged (the US Federal Reserve in Sri Lanka's case) are prone to high inflation.
Analysts have said that if the Central Bank even sterilizes small amounts of foreign exchange purchases each month and avoid printing new money through Treasury bill purchases no new inflation would be generated.
Gentle appreciation of the exchange rate could also counter inflation generated by the anchor central bank. US quantity easing, which weakens the US dollar and pushes up commodity prices like oil and food, spreads inflation to all dollar pegged countries.
http://www.lbo.lk/fullstory.php?nid=1772388889
The central bank said average monthly bank credit volumes had fallen to about 27 billion rupees from April to July compared to 52 billion rupees in the first quarter of 2012.
The central bank said credit volumes were now good enough to keep the economy ticking with the economy estimated to have grown 7.2 percent in the first half of 2012.
Analysts have pointed out that loan growth sky rocketed from the third quarter of 2011 because the monetary authority injected large volumes of central bank credit (printed money) in to the banking system to sterilize or offset liquidity shortages stemming from foreign exchange sales.
The injected money pushed credit volumes above the money raised by banks through deposits and loan repayments, with the resulting demand generating what is commonly known as a 'balance of payments crisis'.
The rupee was gradually floated from February 2012 and sterilized foreign exchange sales ended. The rupee has since failed to appreciate significantly due to unsterilized purchases of foreign exchange by the Central Bank.
The central bank said the credit volumes were enough to keep "reasonably robust economic activity" with the first half of 2012 seeing growth of 7.2 percent.
Sri Lanka is recording positive growth at a time when key economies are shrinking.
In the 12 months to July inflation shown by a consumer price index that measures prices in Colombo rose 9.8 percent after the rupee depreciated around 17 percent.
The Central Bank says inflation has begun to moderate with the index showing 9.5 percent in July and annual inflation is expected to remain within single digits.
"Going forward, demand management policies adopted by the authorities are expected to help contain inflation within single digit levels," the Central Bank said in its September monetary policy review.
In Sri Lanka inflation has always fallen after previous balance of payments crises, as bank credit shrank to levels below new deposits and repayments made by previous customers as long as the state borrowings have been kept in check.
Sri Lanka has a so-called soft-pegged monetary system devised soon after the Second World War by US interventionists. The monetary experiment collapsed spectacularly in the 1971-73 period, plunging the world into an oil shock and high inflation.
But countries like Sri Lanka have persisted with such systems.
Such systems, where an inflation floor is set by the anchor central bank to which the money is pegged (the US Federal Reserve in Sri Lanka's case) are prone to high inflation.
Analysts have said that if the Central Bank even sterilizes small amounts of foreign exchange purchases each month and avoid printing new money through Treasury bill purchases no new inflation would be generated.
Gentle appreciation of the exchange rate could also counter inflation generated by the anchor central bank. US quantity easing, which weakens the US dollar and pushes up commodity prices like oil and food, spreads inflation to all dollar pegged countries.
http://www.lbo.lk/fullstory.php?nid=1772388889
