by: Shihar Aneez

COLOMBO, Aug 20 - Sri Lanka's central bank held interest rates steady on Wednesday for an 18th successive month, leaving them at their highest levels since 2002, saying monetary policy was reining in money growth and inflation was easing.

The overnight repurchase rate remained at 10.50 percent and the reverse repurchase rate at 12 percent.The central bank last raised rates by 50 basis points in February 2007, which was the fifth rise since June 2006 aimed at curbing inflation.

"Inflation ... has shown signs of deceleration in Sri Lanka from July 2008," the bank said in a statement."Since reaching a peak of 28.2 percent in June ... inflation has indicated a turnaround, as expected, by falling slightly to 26.6 percent in July.

"With annual inflation running at more than 26 percent, among the highest in Asia, market players say the central bank's policy rates are artificially low.But the central bank said its "tight monetary policy stance has enabled it to successfully maintain its operational target, namely reserve money, within the targeted path during the first half of the year."The bank downwardly revised its annual average reserve money targets in July to 11.75 percent after cutting it to 12.5 percent from an originally expected 14.7 percent.Analysts said though the policy rates have become meaningless, the central bank has curbed inflation through its monetary policy.

"Whatever inflation we are getting now is imported inflation," said Dhanushka Samarasinghe, head of research at Asia Securities. "It is because of global prices of commodities and not credit expansion or demand expansion.

"Commercial banks use 91-day T-bill rates, currently just below 17 percent, to set their own lending rates. 1 The bank said it had achieved its target and curbed high monetary expansion by issuing T-bills and its own securities to mop up excess money.Broad money growth had decelerated to 13.6 percent in June from 16.6 percent at end 2007, while credit to the private sector also slowed to 12.7 percent by end June from the higher growth rates ranging from 20-26 percent in 2007, the bank said.Sri Lanka's annual inflation fell to 26.6 percent in July for the first time since December, after hitting a 6-year high of 28.2 percent in July, measured on a new index.Analysts and economists are expecting slow economic growth in 2008, due to high borrowing costs and poor credit access for the private sector.

The Central Bank told Reuters in June it expected overall growth of less than an estimated 7 percent, due to its tight monetary policy. The $27 billion economy last year marked 6.8 percent growth.

(Courtesy : Yahoo News )