Central Bank achieves revised reserve money target in 3Q

Reserve money, the operating target for monetary policy of the Central Bank has been well within the revised third quarter target.

The achievement of the reserve money target in September 2008 follows the successful achievement of the targets set for the first two quarters of the year.

Average reserve money during the third quarter was at Rs. 280.6 billion (a growth of 9.8 per cent) compared with the target of Rs. 285.2 billion (a growth of 11.4 per cent, year-on-year), the CB said yesterday.

The Central Bank revised its quarterly targets published in the Road Map for Monetary and Financial Sector Policies for 2008 and beyond to contain the second round effect of the high international commodity prices on future inflation.

The strategy of the Central Bank has been to keep in check the growth in reserve money through open market operations as well as stringent quantitative restrictions and allowing market interest rates to adjust accordingly, to contain demand driven inflationary pressures.

The impact of the tight monetary policy stance maintained thus far has been evident in the deceleration in the growth of monetary aggregates and the decline in inflation. Inflation, as measured by the year-on-year change in the Colombo Consumers' Price Index (base=2002), which reached 28.2 per cent in June 2008 has continued to decline thereafter, to 24.3 per cent by end September 2008. Supported by the continued containment of demand pressures as well as improvements on the supply side, inflation is expected to moderate further during the months ahead.

The turbulent conditions in global financial markets have led to tighter liquidity and credit conditions the world over. The Central Bank of Sri Lanka has been closely monitoring these developments and observed some sharp movements in interest rates which are not warranted under the present conditions where there is sufficient leeway in the reserve money programme. Therefore, considering the firm market liquidity levels maintained thus far through the tight monetary policy stance and the current global developments, the Central Bank has decided to ease the conditions pertaining to the provision of the reverse repurchase facility in order to avert any risks that may arise from liquidity constraints.