The Central Bank said on Tuesday that it was maintaining its policy interest rates at the current level of - Repurchase rate at 7 % and the Reverse Repurchase rate at 8.50 % after considering the economic development last month.
It said inflation remained broadly stable last month with year-on-year inflation at 6.8 % in January, down from 6.9 % in the previous month. Annual average inflation however rose to 6 % from 5.9 % in December 2010.
Price hikes were largely driven by the food and non-alcoholic beverages category. The increase in the price of food items during the month was due to adverse weather conditions. “While the paddy output is expected to be affected due to recent floods, the availability of stocked-up paddy and the possibility of the increase in the extent of cultivation during the yala season are likely to ease any price pressures in 2011,” the Bank said. The recent price surges in other food crops are expected to subside as the situation normalises in the coming months.
Referring to the global economy, the Bank said this is set to recover faster in 2011 than previously expected. While the recovery is likely to improve earnings from exports further, the impact of the global recovery on the demand for key commodities could have an impact on prices, for which the Bank noted, “appropriate measures will continue to be taken to contain the effect of any such developments.”
Certain recently implemented fiscal measures, such as the duty waiver granted for customs import duty on petrol and the reduction in taxes on importation of milk powder, would reduce the upward price pressures arising from adverse international commodity prices.
Official reserves were strengthened further as the International Monetary Fund last week completed its review of the country’s economic performance and approving immediate disbursement of the sixth tranche under the ongoing Stand-by Arrangement. “The high growth momentum in credit to private sector continues and the Central Bank will continue to monitor these developments closely. While short term interest rates have responded positively to the reduction of policy interest rates in January 2011, which was aimed at further encouraging substantial and sustained private sector participation in economic activity, lending rates of many banks are yet to adjust fully,” it said.