Sri Lanka's central bank held interest rates steady on Wednesday for a 10th successive month, saying its policy was tight enough to control demand pressures even as inflation was running at a 17-year high.
Current policy rates remain at their highest since 2002, yet inflation, measured as a 12-month moving average, quickening to 17.7 percent last month, its fastest rate since 1990. The central bank, however, blamed high global commodity prices for the spike in inflation and said its policy has worked well in cooling demand and controlling how much new money gets pumped into the economy.
"In order to contain the demand pressures in the economy, the Central Bank set a tight growth path for reserve money," the central bank said in a statement posted on its Web site.
"The containment of reserve money in turn has succeeded in controlling the rapid expansion in broad money as well," it said after it kept its overnight repurchase rate at 10.50 percent and the reverse repurchase rate to 12 percent.
"The increases in prices of imported commodities such as milk powder, wheat and petroleum contributed to more than 30 percent of the inflation during the second half of 2007," it added. But economists challenged the central bank's analysis, saying its policy rates have become meaningless because they have fallen well behind short-term Treasury bill rates, which banks use as a benchmark to calculate their own lending rates.
The benchmark 91-day Treasury bill rate has risen to more than 20 percent from 14 percent in February, when the central bank last raised rates by 50 basis points. "You have to question how valid these rates are," said Channa Amarathunga, an investment analyst at Boston Capital. "From February to December, the treasury bill rates are up over 600 basis points, but the overnight discount rate for the period stayed unchanged. So something is wrong here."
The central bank said it was on track to meet its 2007 reserve money target, but a bank official, who declined to be named, said it will be hard to hit the year-end broad money growth goal of 13.2 percent.
Governor Ajith Nivard Cabraal acknowledged the central bank had to push back by a year its original goal of bringing inflation to single digits by the end of 2007, citing high prices of oil, which Sri Lanka has to import to cover its energy needs. The central bank has lowered its growth outlook for 2007 to 6.7 percent from an original target of 7.5 percent. The economy expanded 7.4 percent last year, the highest pace since 1978.
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