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| Friday, 16 January 2004 |
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Performance in economy broadly in line with 2003 targets - CB In its monthly review of macroeconomic developments, the Central Bank was of the view that the performance in the economy has been broadly in line with the targets in 2003. Projections for 2004 expect a continuation of these favourable developments, although there are some possible downside risks. Taking into consideration the factors discussed below, the Central Bank has decided to maintain its policy rates at their current levels, i.e., the Repo rate at 7.00 per cent and the Reverse Repo rate at 8.50 per cent. Overall growth The economy grew by 5.6 per cent in the first three quarters of 2003, spurred mainly by growth in the Services sector, although the Industry and Agriculture sectors also recorded growth during this period. Indications are that the annual growth target of 5.5 per cent for 2003 will be realised. The economy has been projected to grow by 6 per cent in 2004. However, the achievement of this target would be dependent on several factors such as the moving ahead of the peace process and the settlement of the current political impasse. The other significant downside risk is the possibility of a widespread drought, which could adversely affect agricultural production and power supply. A positive factor in the external sector is the strong economic growth in the United States. Consumer prices Consumer price inflation as measured by all consumer price indices ended the year within the target indicated at the beginning of the year. Prudent monetary management, fiscal consolidation, and improved domestic production and supply of key consumer goods enabled a faster decline in prices of domestically produced goods and services, while lower international prices of consumer items and a relatively stable exchange rate have kept the increase in import prices at a low level as in the previous year. However, in the last couple of months of 2003, the month to month increase of the CCPI and the SLCPI have been faster than the historical average, implying higher inflationary pressures in the future. Consumer price inflation in 2004 is expected to be around the levels in 2003. The annual average increase in prices is projected at 4-6 per cent (depending on the price indices used). There is some risk of higher inflation particularly from excessive wage increases, higher petroleum prices and a widespread drought. The latter two factors would contribute to an increase in energy prices, thereby adversely affecting all economic sectors. |
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