The Central Bank has decided to increase both the Repurchase rate and the Reverse Repurchase rate by 50 basis points each to 7.50 percent and 9.00 percent, respectively for the first time since 2007.
The Monetary Board which met Thursday has taken the decision to raise the interest rates to control the high expenditure on imports and the increasing credit granted by commercial banks to private sector.
The Bank, in its Monetary Policy Review released today for February said while the inflation declined to 3.8 percent in January, a lowest in 26 months, the total expenditure on imports in the first eleven months of 2011 totaled to a staggering US$ 18.4 billion widening the trade gap by 111.3 percent to US$8.84 billion.
Despite a 22.2 percent growth in the earnings from exports to US$ 9.6 billion during the same period, increased domestic economic activity, low interest rates, as well as the unexpectedly high energy prices in the international market contributed to the increased import expenditure, the Central Bank said.
The Monetary Board explained that despite the high inflows of foreign direct investments and inflows to the Government, the Central Bank had to supply foreign exchange, on a net basis, to mitigate the undue pressure on the domestic foreign exchange market which resulted in the declining of gross official reserves to US$ 5.9 billion by the end of 2011 sufficient for only 3.6 months of imports.
"Meanwhile, credit granted by commercial banks to the private sector increased by 34.5 percent, year-on-year, in December 2011, substantially exceeding projections," the Central Bank said.
Further, the decline in excess liquidity in the domestic money market from Rs.124 billion at end 2010 to the current level of around Rs 15 to 20 billion led to an increase in the market interest rates and commercial banks have competitively raised interest rates during the past few months.
The monetary authority aims to control the import-related credit to reduce the trade gap and to maintain the inflation at mid-single digit levels in the second half of 2012.