Financial Times

Inflation fears plague Central Bank

The Central Bank, worried about rising inflation and the impact on consumer prices, is further tightening monetary policy to control ‘the expansion in reserve money,’ an official statement said this week.

The Bank said it has revised downwards its reserve money targets for the third quarter of the year over and above the already tightened reserve money targets announced in April 2008, which means the ‘targeted rate of expansion in the annual average of reserve money has been lowered from 12.50 percent to 11.75 percent.’

It said there was a likelihood of a further increase in core inflation due to second round impacts of the increases in prices of non core items and the need for stemming the demand pressures to contain inflation.

The Bank said the Sri Lankan economy is estimated to have grown by 6.2 per cent during the first quarter of 2008 compared with 6.1 per cent in the same period last year. The growth was led by the healthy performance of the services sector, which expanded by 6.4 per cent during this period, closely followed by industry and agriculture sectors, which grew by 6.0 per cent and 5.9 per cent, respectively.

Referring to inflation, it said the increase in June was expected as the full impact of the fuel price adjustment that occurred at end May and the entailing transport fare hikes was felt during the month of June. In line with tight monetary policies, credit to the private sector, as high as 26 percent in April - May 2007, decelerated to 13.1 percent by end May 2008. Overall credit to the public sector, which includes credit extended to the government and public corporations, also declined by end May compared with the levels at end 2007 largely on account of the decline in credit utilised by the public corporations.

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