CENTRAL BANK RAISES ‘REPO’ RATE

The Central Bank has decided to increase its “Repo” rate by 25 basis points from 5.25 percent to 5.50 percent effective from July 22, 2005.  This rate was last changed in March 2005. Among its reasons for the move, the bank said, was increased fiscal pressure and a surge in foreign exchange demand. The most recent data released by the Central Statistical Office indicate that, after two consecutive months of decline, headline inflation in June (year-on-year) edged upwards to 6.58 per cent from 6.48 per cent in the previous month. 

Core inflation was also slightly higher rising to 2.64 per cent in June (year-on-year) from 2.59 percent in May.  The increase in core inflation was in the housing component of the Retail Prices Index. The decision to raise the “Repo” rate was made against the background of the following developments:

*The announced increase in cement prices, adverse weather conditions and the difficulties at the port could create further price pressures in the coming months;
*While Government spending has been lagging behind budget projections, the recent passage of supplementary expenditures by the Parliament, if fully implemented, could signal an increase in fiscal pressures; Interest rates have continued to rise in the US, reducing the spread with local interest rates; Foreign exchange demand has been stronger than usual in recent weeks, in part, due to identified capital transactions. The above factors could add to inflationary expectations and justify the need for tightening bank liquidity and providing a corresponding signal through the policy interest rate, the Central Bank said. The next “Repo” rate announcement is scheduled for August 19, 2005.