The Central Bank said that its tight monetary policy has enabled it to maintain reserve money at targeted levels and decelerate high monetary expansion which in turn is causing inflation to decline. "Since reaching a peak of 28.2 per cent, as measured by the year-on-year change in the new Colombo Consumers’ Price Index in June, inflation has indicated a turnaround, as expected, by falling slightly to 26.6 per cent in July," the bank said in a statement. The Central Bank had been using its stock of Treasury bills to mop up excessive liquidity in the market. But the bank has exhausted its stock of Treasury bills and has begun issuing its own securities, Central Bank Securities, to the job of Treasury bills. "We have issued about Rs. 8 billion in Central Bank Securities to the money market and depending on the foreign exchange inflows we may have to continue doing so," Central Bank’s Chief Economist Dr. Nandalal Weerasinghe told the Island Financial Review. When foreign currency inflows increase, liquidity of the money market increases correspondingly. The Central Bank then auctions its Treasury bills to mop up the excessive liquidity of the market. Dr. Weerasinghe said that the Central Bank would continue to issue its own securities depending on the level of foreign exchange inflows as the bank had a policy of restraining from investing in Treasury bills. "This is nothing new. Central Banks of many countries issue their own securities," he said. He said that the Central Bank had to bare a cost by issuing its own securities because of the interest that must be paid. The interest is determined by the money market when the securities are auctioned to primary dealers. "The profit margins of the bank will be hit but the bank’s purpose is to curtail credit expansion and bring inflation under control and is not concerned about the profit to be transferred to the government at the end of the year," Dr. Weerasinghe said. "Accordingly, the broad money growth decelerated from 16.6 per cent at end 2007 to 13.6 per cent by end June. Credit to the private sector, which was on a higher than desired growth path and remained a concern of the Central Bank, also decelerated to 12.7 per cent by end June, from the higher growth rates ranging from 20 - 26 per cent in 2007. The Central Bank said its tighter monetary policy stance had yielded its desired impact on monetary aggregates, decelerating the expansion in aggregate demand. "The favourable impact of this deceleration in aggregate demand coupled with the healthy developments on the supply side is expected to be observed during the forthcoming months in the form of moderating inflationary pressures in the economy," it said. |
