Reserve money growth within target in 1Q, 2008 -CB

The continuous tight monetary policy stance of the Central Bank has been successful in maintaining reserve money well within the target set for the first quarter of 2008. This follows the successful achievement of quarterly reserve money targets in 2007, indicating a continuous deceleration in monetary expansion.

At the beginning of 2008, the Central Bank announced its monetary and financial sector policy stance for the year in the Road Map for Monetary and Financial Sector Policies for 2008 and beyond.

This document also enunciated the growth path for reserve money, the operating target of the monetary targeting framework, as well as broad money, the intermediate target and the strategies to be pursued by the Bank in achieving these targets.

To enhance the effectiveness further, reserve money targets were made tighter by setting them on quarterly averages of daily reserve money as against the end quarter reserve money as set in previous years.

This requires greater discipline on the part of the Bank in managing the reserve money to attain the target levels.

The monetary policy implementation strategy since 2007 was more geared towards not exceeding tight quantitative targets of monetary aggregates and thereby allowing market interest rates to adjust upwards to curtail the excessive demand. Accordingly, market interest rates adjusted upwards and continued to remain at a higher level.

This has led to a substantial decline in the demand for money, helping to maintain reserve money well below the targeted level during the first quarter of 2008.

Accordingly, the quarterly average of daily reserve money during the first quarter remained at Rs. 273.7 billion compared with the targeted ceiling of Rs. 281.5 billion. This denotes a deceleration in the expansion of quarterly average reserve money from 19 per cent in the first quarter of 2007 to 11.7 per cent in the first quarter of 2008.

The decelerating trend in reserve money experienced since the beginning of 2007 has led to decelerate the growth in broad money supply as well, particularly through the decline in the growth in credit to the private sector.

The private sector credit growth, which was as high as 24- 26 per cent during the first half of 2007, declined steadily thereafter and reached 18.3 per cent in January 2008.

Accordingly, the growth in broad money expansion decelerated from 20-22 per cent in the corresponding period to 15.8 per cent in January 2008. The provisional data for February also indicates a further deceleration in the growth of both private sector credit and broad money.

Meanwhile, Net credit to the Government (NCG) from the banking system, also indicates a declining trend, thereby lowering the pressure on monetary management. These developments would help to reduce demand pressures on prices and thereby to reduce the demand-pull inflation in the coming months.