All analysts expect CB to keep policy rates unchanged

Tuesday, 8 February 2011 00:17 - - {{hitsCtrl.values.hits}}

All analysts polled by Reuters expect the Central Bank to keep policy rates unchanged following this week’s monetary policy review for February.

The post monetary policy review statement will be out Tuesday morning.

Following is Reuters Forecast.

* The central bank is expected keep both its repurchase rate and reverse repurchase rate steady at over six-year lows of 7 percent and 8.50 percent respectively, according to all 15 analysts polled.

Factors to watch:

Signs of demand-driven inflation, which the International Monetary Fund (IMF) and the central bank indicate, are yet to be seen.

Measures the government will take to curb supply side shocks after recent flooding threatened 90 percent of the staple rice crop.

Central Bank may appreciate the rupee <LKR=> to curb inflation from imports by artificially boosting the currency, despite the IMF asking it to allow flexibility in both directions.

If the $50 billion economy can achieve the central bank's estimated 8.5 percent growth rate this year after the flooding, which the government in January had estimated had caused about 50 billion rupees in damage, or about 1 percent of the growth. That figure does not include the latest round of floods in February.

If the government replaces the current inflation index with a new one that lowers the weighting of food and energy costs, the two most volatile. That may keep official inflation figures in single digits while the reality is higher.

If private sector credit growth is getting overheated, it expanded 23.1 percent month-on-month in November, higher than the central bank's end-2010 forecast of 15 percent. Analysts have said a gradual increase in inflation will prompt a slow tightening of monetary policy in response to stronger credit demand and economic activity.

If the central bank's foreign exchange control relaxation reduces market interest rates by bringing more dollar inflows, it will reduce the government's dependence on local funds to finance its debt and budget deficit.

Market impact:

Steady policy rates will boost private sector credit growth further after last month's surprise rate cut, though large corporates are yet to take big loans. However, unchanged policy rates coupled with low tax rates could boost corporate sector credit growth and the stock market in 2011.