The Central Bank of Sri Lanka Monday loosened its tight monetary policy as the inflation rate showed signs of slowing down. The Colombo-based bank cut the penalty rate on reverse repurchase transactions to 17.0 percent from 19.0 percent. "The Central Bank has decided to ease its monetary policy stance in view of the declining inflation and inflation expectations," the bank said.
"The penal rate now serves as a ceiling on overnight interest rates and as a benchmark rate for other market rates. This reduction in the penal rate will lead to a further reduction in market rates of interest," the bank said. Consumer prices in Sri Lanka eased to 22.6 percent in December due to lower prices of food during this month, the bank said.
The annual average inflation rate in November was 23.0 percent. Sri Lanka is in the midst of a deadly war with ethnic Tamil Tiger rebels. The government plans to spend a record 1.7 billion dollars on its war efforts next year and analysts say the government's war outlay has fuelled inflation.