Monetary Policy Review – August 2009
Market interest rates continue to decline in response to the monetary policy measures taken by the Central Bank, but they are yet to adjust fully to the policy rate reductions by the Central Bank.
Yields on Treasury bills, which serve as a benchmark for market interest rates, have declined by around 675-715 basis points, so far this year.
Meanwhile, the weighted average call money rate has also declined by 500 – 600 basis points. Amongst other market interest rates, the average weighted deposit rate has declined by about 65 basis points while the average weighted prime lending rate has declined by about 415 basis points, by July. The decline in interest rates, both in nominal as well as real terms, together with improved business confidence is expected to encourage economic activity in the country during the remainder of the year.
Enhanced external sector stability over the recent months has enabled the Central Bank to build up its foreign exchange reserves substantially while curtailing volatility in the exchange rate. Net foreign exchange purchases by the Central Bank in the domestic foreign exchange market have continued to be positive since early July, supported by the steady inflow of remittances, export proceeds, and non-resident investments.
By 17 August 2009, net foreign exchange purchases by the Central Bank in the domestic market had exceeded US dollars 600 million. The disbursement of the first tranche of the IMF-SBA facility has further boosted gross external reserves. Excluding the first tranche of the IMFSBA facility, the gross official reserves of the country had exceeded US dollars 2.3 billion by 17 August 2009.
Supported by the demand management measures taken earlier by the Central Bank, as well as the benign external prices, inflationary pressures in the economy continue to be subdued. Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index
(2002=100) declined steadily till June 2009, reaching 0.9 per cent, but increased marginally to 1.1 per cent in July. As in other parts of the world, in Sri Lanka too, inflation is expected to rise moderately during the second half of the year 2009 along with the base effects stemming
from the sharp price increases last year dissipating gradually. Nevertheless, inflation on an year-on-year basis, is expected to remain at single digit levels throughout this year.
Taking these developments into account, the Monetary Board, at its meeting held on 17 August 2009, has decided to maintain the policy interest rates of the Central Bank at their existing levels.
First phase of Norochcholai Power Plant completed
The first phase in the construction work of the Norochcholai Coal- Power Project, which is expected to add another 300 megawatts to the national grid within the first quarter of the next year, has reached completion now, Minister of Power and Energy,W.D.J. Seneviratne told
The successful completion of the project will be declared ceremonially in accordance with traditional Chinese religious observances on the 20th of this month with the participation of 50 Chinese Buddhist monks. The occasion will also be graced by the Theros of Malwathu and Asgiri Chapters.
The completion of the work will be officially commemorated in planting a Bo sapling in the premises of the Norochcholai power plant and a statue of lord Buddha brought from China will be kept in the premises.
The Government of China will fund this mega project which is estimated as US$ 455 million for the construction work.
US fund buys $875 Sri Lanka rupee bonds pushing reserves above $3bn: CB Governor
Aug 20, 2009 (LBO) – An 875 million US dollar inflow from a US-based fund will go into 4 and 6-year rupee bonds, helping push Sri Lanka’s foreign reserves above 3.0 billion dollars by Friday, Central Bank governor Nivard Cabraal said.
The 875 million US dollar flow from a “US-based fund” will increase the maturity profile of government debt, Cabraal said. He did not give details of the US fund manager.
“This is a result of a road show we did in the US recently,” Cabraal said. “Investors are expecting interest rates to fall further so they can lock in profits.”
Government rupee bonds now yield about 13.0 percent.
Cabraal said total investments to rupee bonds would rise to the equivalent of about 1,250 million US dollars by Friday. The current ceiling for foreign rupee treasuries purchases was about 2.0 billion US dollars, he said.
The inflow will be directly matched with Treasury bonds and the Central Bank’s Treasury bill stock will fall by an equivalent amount and foreign reserves will move up.
The move will increase the tenure of government debt with Treasury bills representing central bank credit being converted to overseas held bonds.
The money will not have an impact on the domestic monetary system, Cabraal said.
The Treasury will still be going ahead with an international bond raising.