Monetary Policy

The Road Map: Monetary and Financial Sector Policies for 2010 and beyond, to be announced tomorrow will enunciate Central Bank of Sri Lanka’s (C.B.S.L.’s)  monetary policy strategy for 2010.
Inflationary pressures continue to remain subdued as reflected by the annual average inflation of around 4% recorded by end November 2009, although year-on-year inflation increased to 2.8 per cent.
The outlook for inflation remains benign.
The development of the Northern and Eastern provinces in the period ahead would result in their increased integration with the rest of the country, leading to enhanced supply of goods and services in the island.  The positive supply side developments expected to take place in the domestic economy are likely to have a favourable impact on inflation, going forward.
The higher reduction in imports expenditure compared to the decline in export earnings has resulted in the trade deficit narrowing significantly during the first nine months of 2009.  The overall deficits in the trade and income accounts were offset by higher inflows into the current transfers and services accounts resulting in a U.S. $ 393 million surplus in the current account for the first nine months of 2009.
It is expected that this performance will continue through the fourth quarter as well and the current account would record a surplus in 2009 for the first time since 1977.
Prospects for domestic economic activity have improved with the more favourable investment climate that now prevails and the gradual recovery of the world economy, supported by C.B.S.L.’s relaxed monetary policy stance.  Hence, it is expected that credit flows will gradually pick up, with the more favourable credit conditions that prevail on account of the decline in market interest rates as well as the more stable conditions in financial markets.  Although broad money supply is likely to further expand, particularly in view of the expansion of the country’s foreign assets and the likely pick up in credit flows to the private sector in the ensuing period, such an expansion has been accounted for in stipulating the monetary targets for last year as well as for this year.
Considering these developments, the Monetary Board at its last month meeting decided to maintain its policy interest rates at their current levels.  Accordingly, the Repurchase and Reverse Repurchase rates would remain at 7.50% and 9.75% respectively.
The release of the next regular statement on monetary policy will be on  January 19.