The RP rate (graph from Bloomberg)
The Central Bank today slashed a benchmark interest rate, the reverse repo-rate, by 50 basis points. This is a six year low for this particular rate and came as an unexpected measure on the part of the Central Bank.
The reverse repo rate, broadly speaking, is a rate for commercial bank deposits at the Central Bank. Reduction of the rate is aimed at increasing money supply, by encouraging commercial banks to look for other places to put their money.
This comes in the background of falling inflation. Consumer prices in Colombo rose 4.3% in July from a year earlier after gaining 4.8% in June. Inflation has slowed to less than half the average rate of the five years through 2009.
It is clear from statements issued from the Bank that it means to facilitate credit expansion.
“The benefits of the improving macroeconomic structure would also raise the potential of the domestic economy to grow, and such potential should now be provided the space to materialise,” its August monetary policy statement said.
The statement also said that the bank expected credit flows to the private sector to increase along with increasing economic activity.
“At the same time, the expected expansion in credit would serve to reduce the excess liquidity, which has built up in the money market over the past several quarters.” The statement said.