Business Times

CB raises reserve ratios of banks to curb inflation

The Central Bank’s Monetary Board decided recently to increase reserve ratios at commercial banks one percentage point to 8 % with effect from April 29 in a bid to curb rising inflation. The Central Bank (CB) said in a statement that notwithstanding the favourable developments in the economy, broad money growth continued to accelerate with year-on-year growth recording 17.7 % in February 2011.

This growth has been mainly driven by increased credit flows to the private sector, which expanded significantly by 29.7 %, reflecting the acceleration of economic activity and the low base effect.
“While the excess liquidity in the domestic money market remains a concern, left unchecked, it could further expand monetary aggregates, leading to higher inflation than originally envisaged. Thus, the Monetary Board considers it prudent to pull back any buildup of demand-side pressure on inflation and ensure continued monetary stability,” the CB added.

In a statement on monthly monetary policy, the CB said on a year-on-year basis, the CCPI (cost of living index) increased from 7.8 % in February 2011 to 8.6 % in March while annual average inflation increased marginally to 6.2 % in March. Harvesting of paddy in major growing areas is in progress while the seasonal vegetable harvest and fish production have also started to reach the market. These positive developments would mitigate the effect of higher festive demand on prices in April.

Although domestic petroleum and gas prices were adjusted to reflect the high international energy prices, the impact of the adjustment on inflation is expected to be low. However, persistently high and volatile international energy prices remain a concern for domestic economic and price developments, it said.

Positive trends in the external sector that were seen in 2010 continued into 2011. Earnings from exports increased by 72.4 % in January while expenditure on imports also grew. Worker remittances as well as earnings from tourism also continued to increase

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