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CBSL policy rates unchanged


Sri Lanka’s Central Bank said it was holding its policy rates at 15.50 percent, while data showed market interest rates are close to twice the rate and private credit and imports falling as a consequence.

The central bank is injecting 740 billion rupees of overnight money to banks at 15.50 percent, which were originally injected mostly after reserves were sold for imports (or debt repayments) to artificially keep down rates (sterilized interventions), effectively engaging in monetary financing of imports.

The injections (sterilizing outflows) prevent the credit system from adjusting to the outflows and encourage unsustainable credit without deposits, which is the core problem with soft-pegged central banks, triggering a high rates and an economic slowdown later.

A severe correction is now taking place with prime lending rate around 25 percent and the three month Treasury bill yield around 29 percent.

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