The Monetary Board of Sri Lanka has finally decided to increase the policy rates by 50 basis points owing to increased private sector credit growth that is resulting in a widening trade deficit.
Accordingly the Central Bank of Sri Lanka (CBSL) in a statement said the its new Repurchase rate and the Reverse Repurchase rate will be 7.50 and 9 percent, respectively.
The CBSL said credit granted by commercial banks to the private sector increased by 34.5 percent, year-on-year, in December 2011, substantially exceeding projections, driven by import related items such as motor vehicles.
At the same time, excess liquidity in the domestic money market declined from Rs.124 billion as at end 2010 to the current level of around Rs 15 to 20 billion, and such decline in liquidity in the domestic money market led to market interest rates recording an upward movement in recent months.
The CBSL also said gross official reserves (excluding Asian Clearing Union balances) declined to US dollars 5.9 billion by end December 2011, representing the equivalent of 3.6 months of imports.
Sri Lanka being an import oriented country, CBSL has been defending the LKR to keep inflation at single digit levels, while keeping the interest rates down to spur growth.