Alert on inflation CB thumbs up economy

Central Bank yesterday indicated that all is well with the economy and its future prospects though admitting it was on guard over external price pressures on macro-economic stability.

The latest assessment which also ensures policy rates remaining unchanged follows the March monetary policy review.

The Bank said inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002), which remained between 5-7% during the period since July 2010, increased to 7.8% in February 2011, while annual average inflation increased marginally from 6.0% in January to 6.1% in February 2011. This anticipated increase was due to the increase in prices of food items, especially vegetables, following short-term supply disruptions caused by floods in major food producing areas. While relatively large stocks of many varieties of vegetables have started reaching the market since the last week of February from areas where crop damage was insignificant; the supply from affected areas is also expected to improve towards April and May.

The impact on rice prices is also likely to remain low during the year with stocks being released to the market and the expected increase in the extent of cultivation during the yala season, resulting in higher output, the Bank said.

“Continuous increase in the prices of key international commodities, particularly that of crude oil, remains a concern. The recent geo-political disturbances in some Middle-Eastern countries have pushed global crude oil prices over the levels previously projected by international agencies.

The possible impact of these external price pressures on macroeconomic stability is closely monitored and appropriate measures will be taken if clear signs of persistence of these adverse developments emerge,” the Central Bank assured.

It also said the external sector performance in 2010 has been favourable. The cumulative earnings from exports recorded a historic high, while expenditure on imports has also rebounded. Increased worker remittances and earnings from tourism as well as high inflows to the financial account resulted in a surplus in the overall balance of payments in 2010. The gross official reserves continue to remain high above $ 6 billion. So far during the year, the rupee has appreciated marginally against the US dollar.

Broad money (M2b) recorded a year-on-year growth of 15.8% in December, while the increase in credit granted to the private sector was 25.1% on a year-on-year basis partly due to a lower base. The average growth of broad money during 2010 was 15.3%, which was broadly in line with the monetary programme. Market interest rates have remained broadly stable so far during the year. The Central Bank will continue to monitor the high growth in credit to the private sector and overall trends in monetary aggregates.  

Taking into consideration the above developments, the Monetary Board, at its meeting held on 7 March 2011, decided to maintain the policy interest rates of the Central Bank at their current levels. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would remain at 7.00% and 8.50%, respectively.

The release of the next regular statement on monetary policy will be on 19 April 2011.

$ 199 m raised via 3, 4 year Development Bonds

The Central Bank said yesterday it has raised US$ 199 million via a combination of three and four year Sri Lanka Development Bonds (SLDBs) at attractive rates of interests.

It said on behalf of the Government an issue of SLDBs worth $ 185 million was on offer to eligible investors for subscription at a rate of US Dollar 6 month LIBOR plus a margin to be determined through competitive bidding. The offer was opened from 1 - 8 March 2011 for bidding with the settlement on 16 March 2011.

“Both foreign and local commercial banks bid at the auction with the total bids received amounting to US Dollars 204.25 million,” the Bank said.

Of the bids received, the Government decided to accept US Dollars 99 million in 3 year SLDBs and US Dollars 93 million in 4 year SLDBs at the market determined rate of US Dollar 6 month LIBOR + 375 bps (weighted average margin) and 6 month LIBOR + 385 bps (weighted average margin), respectively. Yesterday the US Dollar 6 month LIBOR rate is 0.46%.

The Bank said the SLDB issue was executed in terms of Section 2 (a) and 2 (c) of the Foreign Loans Act No. 29 of 1957 as amended, and the funds mobilised through the new SLDB issuance are to be used to settle maturing SLDBs of US Dollars 185 million.

The SLDBs are transferable by endorsement, delivery and registration with the Superintendent of the Public Debt of the Central Bank of Sri Lanka. Eligible investors may purchase SLDBs in the secondary market through designated agents appointed by the Central Bank of Sri Lanka.