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Inflation, money supply prompt CB to hike interest rates
Wednesday, 14 September 2005 - 4:50 AM SL Time
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Rising inflation and money supply in the country has forced the Central Bank to hike its policy rates by 25 basis points, the third such upward revision so far this year.
Following its monthly monetary policy review, which assess recent economic developments and future projection, the Monetary Board decided to increase the Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate by 25 basis points to 8.50%and 10.00 per cent, respectively, from 13 September 2005.
To reinforce this measure, the Central Bank will continue to engage in open market operations to siphon off excess liquidity from the banking system.
Central Bank said inflation measured as the point to point change in the Colombo Consumers` Price Index (CCPI) has been moderating since February 2005. However, it increased during the last two months recording 10.8%in July and 10.9%in August. The moving average increased from 12.7%in July to 12.8%in August.
As a result of continued efforts by the Central Bank, reserve money has been growing closer to the targeted path. The Central Bank policy measures included the conduct of open market operations more aggressively by mopping up of excess liquidity, both on a permanent as well as on an overnight basis, and increasing policy interest rates.
'However, the growth in reserve money experienced in August 2005 was 18.3 per cent, which is above the targeted path. Correspondingly, broad money growth too has been rising at around 19%largely due to expansion in the private sector credit. This situation calls for adopting appropriate policy measures aimed at slowing down the growth rates in monetary aggregates,' Central Bank said.
Suggesting that rising inflation and money supply were key concerns the Central Bank announcement had better news on other issues.
It said the growth momentum in all major sectors of the economy continues. The Agriculture sector is expected to rebound in 2005 benefiting from favourable weather conditions. Paddy production is expected to reach a record level in 2005, with the historically highest harvest during the 2004/05 Maha season and the expected good harvest in Yala 2005. Tea and rubber production increased significantly in the first half, while the recovery in coconut and fish production continued. Subsidiary food crops also performed well during the 2004/05 Maha season. The output of the Industrial sector has grown by 5.9%during the first half of 2005. This growth has been broad-based and balanced across export and domestic market-oriented industries. Growth in the services sector also continues reflecting the growth momentum in the major sub sectors such as port services, telecommunications and transport.
Exports continued to expand during the first seven months of the year. Export earnings grew by 10.7%to US dollars 560 million in July 2005, outperforming the 2.5%growth recorded in July 2004. Cumulative exports in the first seven months of 2005 recorded a growth of 11.4 per cent. Imports grew at a relatively lower rate of 8.5%in July 2005 following the higher growth of 18.0%recorded in June 2005. Overall imports for the first seven months grew by 10.1 per cent. The trade deficit widened marginally in July 2005, and the deficit has been financed through increases in private transfers, especially worker remittances, official inflows to the government and the savings from the debt relief.
The surplus in the balance of payments is estimated at US dollars 152 million for the first eight months of 2005. Gross official reserves have increased to US dollars 2,328 million by end August, compared with US dollars 2,196 million by end December 2004. Reflecting these developments, the rupee has appreciated against the US dollar by 4.6%during the first half.The release of the next regular statement on monetary policy is scheduled for 14 October 2005.
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