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CENTRAL BANK OF SRI LANKA
Information Department
30, Janadhipathi Mawatha, Colombo 1.
Tel : 2477424, 2477639,2477420
Fax : 2346257, 2477739
E-mail:[email protected]; [email protected]
www.centralbanklanka.org
PRESS RELEASE
Date: 16-08-2006
Issued By: Economic Research Department
Monetary Policy Review – August 2006
Having reviewed the recent economic developments and prospects, the Monetary
Board at its meeting held on 15 August 2006 decided to maintain the policy interest rates
of the Central Bank at their current levels and to continue with the conduct of open
market operations to decelerate the monetary expansion to the desired path.
Accordingly, the Central Bank’s policy rates, viz. the Repurchase and Reverse
Repurchase rates, will continue to be at 9.125 per cent and 10.625 per cent, respectively.
The following were the main considerations in arriving at this decision.
Economic activity continues to expand as expected, underpinned by the robust global
economic growth and sustained domestic demand. All major sectors are expected to
perform well and contribute to overall growth in the economy. The Agriculture sector is
expected to expand in 2006 mainly due to better performance of tea, rubber and coconut,
and the expected recovery in the fisheries sector. Maha 2005/2006 paddy production
reached a record harvest level. The Industry sector is expected to grow further in 2006
benefiting from the improvements in both export-oriented industries and domestic market
oriented industries. The continued expansion in construction activity bolstered by the
expansion in both residential and non-residential construction, and increased hydropower
generation would contribute further to the expansion of the Industrial sector output.
Within the Services sector, the dynamism seen in the main sub sectors of trade,
telecommunication, transportation and financial services, will continue in 2006.
International trade is expanding on both import and export fronts. Cumulative
exports grew by 8.8 per cent during the first six months of 2006, reflecting the higher
growth in exports of rubber based products, textiles and garments, and food and
beverages. Imports grew at a faster rate of 20.3 per cent in the first half of 2006 due to the
higher increase in intermediate and investment goods. The increase in the imports of
intermediate goods was led mainly by historically high petroleum prices. Imports of
investment goods were driven largely by the imports of transport equipment, machinery
and equipment and building materials.
Although the trade deficit widened, it was
partially offset by higher foreign currency inflows to the country through private
remittances, which grew at 24 per cent during the first half of 2006, and higher net
inflows to the government. Accordingly, the balance of payments (BOP) has recorded a
surplus of US dollars 164 million by end July 2006. Reflecting the BOP surplus, the
gross official reserves have increased to US dollars 2,542 million by 11 August 2006
from US dollars 2,458 million at end 2005.
The high increases in consumer prices arising from past high monetary growth
moderated somewhat in July 2006 responding to tight monetary policy measures.
Inflation, measured as the point-to-point change in the Colombo Consumers’ Price Index,
declined from 17.7 per cent in June 2006 to 14.7 per cent in July 2006, and is expected to
moderate further. However, the Monetary Board expressed concern over the continuing
rise in international oil prices exerting pressure on the country’s balance of payments.
This had made it necessary for the country to increase domestic fuel prices. The possible
solutions include all to conserve energy and economise the use of fuel, since the country
cannot continue to subsidise the energy consumption.
The tight monetary policy stance adopted from end 2004 was further firmed in
2006 to curtail the high growth in monetary and credit aggregates and the rising
inflationary pressures. The Central Bank raised its policy interest rates by 25 basis points
in June and a further 12.5 basis points in July and has been conducting open market
operations aggressively.
In response, the high growth in the money supply has
decelerated, though it still remains high. Reserve money growth was 18 per cent by July
2006. Growth in broad money continued to remain high around 19-20 per cent during
January – June 2006, mainly due to the higher expansion in credit to the private sector
and the government. In June 2006, the broad money supply moderated to 18.8 per cent.
It is expected that the monetary policy measures thus far taken would help contain the
high growth in money supply and reduce inflationary pressures in the economy.
The release of the next regular statement on monetary policy is scheduled for 13
September 2006.