Jan 02, 2013 (LBO) - Sri Lanka's central bank has narrowed a policy rate corridor cutting its policy rate window for injecting cash into the banking system by 50 basis points to 8.00 percent but left its rate to withdraw cash unchanged at 6.50 percent.
With credit growth weak and excess liquidity in money markets generated from dollar purchases, the active policy is the 6.5 percent repurchase window, with overnight risk free money markets rates hovering now around 7.35 percent.
Sri Lanka has a soft-pegged exchange rate and money (bank rupee reserves) is created both though monetizing debt and dollar purchases.
With the floor rate being currently active, the cut in the ceiling rate to 8.00 percent may have little real effect on the market other than narrowing the policy rate corridor from 200 to 150 basis points, analysts say.
The last open market auction on December 26 was also conducted at 6.98 percent.
A wider policy rate corridor has the advantage of allowing market rates to move up immediately in response to higher credit higher demand without a policy rate hike, allowing the exchange rate to be strong, inflation low and the economy stable.
Sri Lanka's inflation was 4.7 percent in the 12 months to December 2013.
Sri Lanka's market gilt rates have fallen around 200 basis points over the past two months as borrowings by the state and state energy enterprises reduced.
The central bank said it would no longer give securities for cash withdrawn through the window from market participants, ending the process of repurchasing securities from market participants overnight.
With uncollateralized deposits at the monetary authority, the window will now be re-named the standing deposit facility.
The reverse repo window through which money is injected to banks will also be re-named standing lending facility, but the deals will continue to be collateralized.
Open market operations carried out within the standing facility rate corridor will also be collateralized.
Update II
www.lbo.lk
With credit growth weak and excess liquidity in money markets generated from dollar purchases, the active policy is the 6.5 percent repurchase window, with overnight risk free money markets rates hovering now around 7.35 percent.
Sri Lanka has a soft-pegged exchange rate and money (bank rupee reserves) is created both though monetizing debt and dollar purchases.
With the floor rate being currently active, the cut in the ceiling rate to 8.00 percent may have little real effect on the market other than narrowing the policy rate corridor from 200 to 150 basis points, analysts say.
The last open market auction on December 26 was also conducted at 6.98 percent.
A wider policy rate corridor has the advantage of allowing market rates to move up immediately in response to higher credit higher demand without a policy rate hike, allowing the exchange rate to be strong, inflation low and the economy stable.
Sri Lanka's inflation was 4.7 percent in the 12 months to December 2013.
Sri Lanka's market gilt rates have fallen around 200 basis points over the past two months as borrowings by the state and state energy enterprises reduced.
The central bank said it would no longer give securities for cash withdrawn through the window from market participants, ending the process of repurchasing securities from market participants overnight.
With uncollateralized deposits at the monetary authority, the window will now be re-named the standing deposit facility.
The reverse repo window through which money is injected to banks will also be re-named standing lending facility, but the deals will continue to be collateralized.
Open market operations carried out within the standing facility rate corridor will also be collateralized.
Update II
www.lbo.lk
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