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Inflation measured as the annual average change in the CCPI declined from 11.6 per cent in December 2005 to 9.6 per cent in March 2006. Inflation measured as the point-to-point change in the Sri Lanka Consumers' Price Index (SLCPI), which declined at a faster pace in 2005, was 3.5 per cent in February 2006 compared to 3.6 per cent at the end of 2005. Inflation is expected to remain at moderate levels in 2006, a press release from the Central Bank said.

Having reviewed the recent economic developments and prospects, the Monetary Board has decided to maintain the policy interest rates of the Central Bank at their current levels and to continue with the conduct of open market operations to decelerate the monetary expansion to the desired path, the release said.

Accordingly, the Central Bank's policy rates, viz. the Repurchase and Reverse Repurchase rates will continue to be at 8.75 per cent and 10.25 per cent. The following were the main considerations in arriving at this decision.

The expansion in economic activities is expected to strengthen further in 2006 building on the strong growth momentum in 2005 and favourable external economic environment. The agricultural sector is expected to expand reflecting better performance across all sub-sectors including a full recovery in the fishing and coconut sub-sectors.

The industrial sector is expected to grow further in 2006 benefiting from the improvements in both export oriented industries and domestic market oriented industries supported by increased market access through multilateral and bilateral trading arrangements.

The construction sector is expected to improve substantially with new housing as well as tsunami reconstruction activities. The value addition from hydropower generation is expected to increase as a result of favourable weather conditions.

The available indicators suggest that the dynamism in the services sector, especially in port services, telecommunication, trade, tourism and financial services sub-sectors, will prevail in 2006. Exports and imports expanded further in February 2006 with imports growing at a faster rate due to the increase in intermediate and investment goods including petroleum imports.

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