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31 December, 2015 09:03 AM Source: Financial Times - Sri Lanka
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Reacting to higher inflation and currency depreciation the Central Bank yesterday increased bank reserve ratios by 1.50 points to 7.50% to reduce liquidity though it stopped short of changing key policy rates as widely expected.

The Monetary Board decided at its meeting held on 30 December, to raise the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50% to be effective from the reserve week commencing 16 January 2016, the Central Bank said in a statement. This increase is the first since April 2011.

Furthermore, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.00% and 7.50%, respectively. A Reuters poll had predicted rates would be raised by 25 bps.

“The year-on-year growth of broad money (M2b) continued to expand at a high rate of 17.0%n October 2015 compared to 16.0% recorded in the previous month, driven by theexpansion of credit extended to both private and public sectors by the banking system. Amongst contributory factors, credit granted to the private sector by commercial banks increased by 26.3 percent, year-on-year, compared to 22.2% in the previous month. Tentative data for November2015 also shows that credit flows to the private sector continue to expand at a high rate,” it noted.

Meanwhile, excess liquidity in the domestic money market continues to remain high, fuelling monetary expansion.

Headline inflation, as measured by the Colombo Consumers’ Price Index(CCPI, 2006/2007=100), increased to 3.1%, on a year-on-year basis, in November 2015 from1.7% in October 2015. On an annual average basis, headline inflation increased to 0.9 percent in November 2015 compared to 0.7% in the previous month. Following a similar trend,headline inflation based on the National Consumer Price Index (NCPI, 2013=100) also increased to 4.8%, on a year-on-year basis, in November 2015 from 3.0% in October 2015.

Reflecting the firming up of aggregate demand conditions in the economy, the CCPI-based core inflation rate registered 4.3%, on a year-on-year basis, in November 2015 vs. 4.4% in the previous month and compared to its recent low of 0.8% in February 2015. Meanwhile,core inflation measures, based on NCPI, also suggest rising underlying inflationary pressures in theeconomy.

On the external front, the decline in expenditure on imports in October 2015 was greater than the decline in earnings from exports, narrowing the deficit in the trade account by 6.8%,on a year-on-year basis, to US dollars 791 million. However, on a cumulative basis, the tradedeficit during the first ten months of the year widened by 2.5% to US dollars 6,936 million reflecting the continued increase in non-oil imports. - See more at: http://www.ft.lk/article/514669/CB-ups-bank-reserve-ratios-to-7-50-#sthash.Ih0NwN2E.dpuf

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