CB seen holding rates steady today to support economy

Central Bank cut key rates to record low in April

Fin Min wants to bring down rates to 4-5%

(Reuters): Sri Lanka’s central bank is expected to keep its key policy interest rates unchanged at record lows for the seventh straight month on Tuesday, a Reuters poll found, as policymakers remain focused on spurring economic growth amid global headwinds.

Twelve out of 15 analysts surveyed expected the Central Bank of Sri Lanka to hold the standing deposit facility rate (SDFR) steady at 6.00% and the standing lending facility rate (SLFR) at 7.50%.

 All 15 analysts predicted the statutory reserve ratio (SRR) for commercial banks would remain unchanged at 6.00%.

One analyst expected the central bank to raise SDFR and SLFR by 50 basis points (bps) each, while another tipped a 25 bps rise in both rates. One expected a 25 bps cut in both rates. 

Sri Lanka’s Finance Minister Ravi Karunanayake last month called for the central bank to make a big cut in interest rates and said that he would like to see them as low as possible, possibly around 4-5%. 

The International Monetary Fund in September said that the key policy rates were not “necessarily inappropriate.”

The central bank in April surprised markets with a 50 bps cut to spur economic growth and boost consumer prices. Until then, it had held rates steady for 14 months. 

The policy stimulus appears to be helping. Sri Lanka’s economy grew 6.7% in the second quarter of this year compared with the same period a year earlier, accelerating from 4.4% in the first quarter. 

Karunanayake during his 2016 budget speech on Friday estimated the economy would expand 6% this year and aimed at achieving annual growth of 7-8% during the next few years. 

Annual private sector credit growth hit a near three-year high of 21.3% in August, compared to 21% a month earlier, picking up speed after remaining sluggish at the start of the year. 

Despite policy rates at record lows, market interest rates have been on the rise since May following heavy local borrowing by the government. The benchmark 91-day T-bill yield is hovering around a six-month high.