Sri Lanka Inflation down to 5.3pct, Long Term Treasury Bill Rates Up, Dollar Trades at 113.80/85

01st June 2010, www.island.lk, By Devan Daniel

The general level of prices increased 1.6 percent in May while the rate at which prices increase, or inflation, declined further to 5.3 percent during the month of May after reaching 6.9 percent in February, data from the Department of Census and Statistics showed.

The Colombo Consumers’ Price Index, the official inflation index in Sri Lanka, gained 1.6 percent to 215.9 points in May from 212.6 points the previous month. The annual average rate of inflation however continued to move upwards, reaching 3.6 percent.

A senior official of the Department of Census and Statistics said overall prices of goods represented in the CCPI increased 1.6 percent from April to May due to price increases of gas, flour, vegetables and fish.

"The heavy rains we experienced during the last weeks of May resulted in price increases for vegetables and fish," he said.

The Monetary Board of the Central Bank decided to hold policy rates steady at 7.50 percent and 9.75 percent for commercial bank overnight deposits and borrowings respectively with the Central Bank.

With inflation expected to be benign over the coming months, the Central Bank said there was still room for commercial banks to reduce their lending rates further and increase their lending in a bid to stimulate economic growth.

The credit stock to the private sector increased a marginal 0.1 percent in March to Rs. 1,235.4 billion from Rs. 1,234 billion in March 2009. Credit from the domestic banking sector increased 0.5 percent to Rs. 1,084.3 billion. Foreign sources accounted for credit amounting to Rs. 150.8 billion, a 2.4 percent decline from the previous year.

Net credit to the government declined by 6.9 percent to Rs. 655.2 billion from Rs. 704 billion a year ago. Credit to corporations increased by 84 percent to 96.9 billion from Rs. 52.6 billion.

However, analysts are worried that government borrowings could lead to inflationary pressure.

Public debt which was 86.2 percent of GDP in 2009, from 81.4 percent in 2008, has already expanded by 2.5 percent during the first two months of this year.

Dealers said rupee liquidity in the domestic market was still high at around Rs. 24 billion, and with relative quiet, the dollar was trading at around 113.80/85 yesterday.

With high levels of excess liquidity in the market, commercial bank appetite for government securities has not subsided.

At last week’s primary market auction to re-issue maturing Treasury bills amounting to Rs. 13 billion, bids came in for Rs. 18.3 billion. However, the Public Debt Department of the Central Bank accepted only Rs. 6.4 billion, rejecting the rest in a bid to control rates.

Rs. 6.5 billion was pumped into the system as the Public Debt Department paid off the maturing bills, for which re-issue bids had been rejected. Analysts said this was done by printing new money to this value, but the Central Bank said it has excess funds for this purpose.

If commercial bank confidence improves and more lending takes place, such liquidity injections could lead to inflation as consumption picks up.

Longer-term Treasury bill rates increased marginally last week.

The three-month Treasury bill rate fell marginally to 8.10 percent at last week’s auction from 8.13 percent a week ago. Rates on the six-month and 12-month bills increased marginally to 8.91 percent and 9.26 percent respectively from 8.88 percent and 9.23 percent a week before.