The turbulence in the
financial markets of advanced economies, which erupted last year and
continued into this year, has exacerbated, spurring cascading effects on
most economies world over. Its effects on credit markets and the resulting
contraction in liquidity have brought on a period of instability and
uncertainty in global financial markets. As a consequence, many central
banks worldwide have taken measures to improve liquidity conditions and
provide stability to markets. The Central Bank of Sri Lanka too initiated
a series of temporary precautionary measures such as relaxing the limits
on access to its reverse repurchase window as well as reducing the
statutory reserve requirement to provide additional liquidity to the
market to alleviate any pressures that may arise due to the current
situation and thereby to ensure the smooth functioning of the domestic
financial system by removing any liquidity constraints.
The perceived global slowdown, as evident by the downward revision to
growth prospects of many countries has induced a further moderation of
international commodity prices. Decreasing external price pressures,
reduced demand pressures due to the tight monetary policy stance adopted
by the Central Bank to curb demand driven inflation, as well as domestic
supply side improvements, in particular the record high levels of output
in respect of many agricultural products including rice, have lowered
inflationary pressures in the economy. Inflation, as measured by the
year-on-year change in the Colombo Consumer’s Price Index (base=2002)
reached 24.3 per cent in September, having continuously declined from the
peak of 28.2 per cent in June 2008. This declining trend is expected to
continue into November.
With the successful achievement of quarterly reserve money targets so
far this year, the steady deceleration in the growth of the broad money
supply would continue further. Broad money (M2b) expansion decelerated to
10.3 per cent, year-on-year, in August 2008, compared to the growth of
16.6 per cent in December 2007 and 22.2 per cent in August 2007. This
deceleration was facilitated by a slowing down of credit extended by
commercial banks to the private sector as well as public corporations. The
outcome of these developments would be evident in the forthcoming months
through a further deceleration in inflation.
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