COLOMBO :Sri Lanka's central bank on Thursday threatened administrative intervention to control high market interest rates that it regarded as out of line with the inflation outlook.
Market rates on longer-term government debt - bonds and treasury bills - are about twice as high as those policy rates for overnight money, increasing the government's burden in covering its budget deficit and refinancing maturing debt. A shortage of foreign exchange reserves to pay for essential imports has added to inflation and triggered a sharp currency depreciation that has also pushed up prices.
"The statement was quite aggressive in saying they are prepared to use non-policy rate tools to nudge market rates, including deposit rates, lower," he added.In keeping its policy rates steady, the CBSL said:"The Board was of the view that the prevailing tight monetary policy stance is necessary to rein in any underlying demand pressures in the economy."
"Economic activity is expected to make a gradual, yet sustainable recovery, supported by envisaged improvements in supply conditions, improved market confidence, and the impact of corrective policy measures being implemented to stabilise the economic conditions," it said.