Sri Lanka Holds Rate, Opting for Tighter Money Supply

By Anusha Ondaatjie

Oct. 20 (Bloomberg) -- Sri Lanka's central bank kept its benchmark interest rate unchanged for a 20th straight meeting, opting to stick to controlling money supply to slow inflation.

The Central Bank of Sri Lanka maintained its repurchase rate at 10.5 percent, in line with the expectations of all nine economists surveyed by Bloomberg News.

Sri Lanka's policy makers have been fighting inflation, which slowed for a third month in September, by setting quarterly targets for the amount of currency in circulation and commercial banks' deposits at the central bank. The Colombo- based bank has also joined monetary authorities worldwide in freeing up lending as the global financial crisis freezes credit.

``The central bank has already taken measures to shore up confidence in the local credit market,'' said Shivantha Meepage, an analyst at HNB Stockbrokers Pvt in Colombo. ``However the major concern still, we believe, is inflation.''

The central bank on Oct. 13 unexpectedly reduced the statutory-reserve requirement by 75 basis points to 9.25 percent in a move to add about 7.5 billion rupees ($69 million) into the financial system. The bank also increased access for lenders and primary dealers to the 12 percent overnight-reverse-repurchase window to 10 times a month, from six times.

Sri Lanka on Sept. 30 increased access to the window, which is the central bank's standing facility to commercial banks and dealers when there is a shortfall in market liquidity, from three times.

Food Costs

Consumer prices in the capital Colombo rose 24.3 percent in September from a year earlier, after increasing 24.9 percent in August, on easing food prices and as the highest interest rates in six years helped damp loan growth.

``Decreasing external prices, reduced demand pressures due to the tight monetary policy stance adopted,'' and increasing domestic agriculture production will help inflation ease through to November, the central bank said in a statement today.

India on Oct. 15 joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch without risking interest rate-cuts that may fan inflation.

The Reserve Bank of India cut its cash-reserve ratio to 6.5 percent from 7.5 percent. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

The central bank will stick to controlling money supply as its main policy instrument, Governor Nivard Cabraal said on Oct. 10. Sri Lanka's inflation rate will fall to below 20 percent in December, Cabraal said on Oct. 2.

In July, the central bank lowered this year's target for reserve-money growth to 11.75 percent from 12.5 percent. The bank said on Oct. 13 that it may revise down its fourth-quarter reserve money target to damp any inflationary pressures from the reduction in the reserve ratio.

``The tight monetary policy stance of the central bank would continue until the inflationary pressures ease,'' the bank said Oct. 13.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.