CB seen keeping rates steady, cutting in 1H

Reuters: The Central Bank is expected to keep key policy rates steady on Thursday after last month’s surprise rate cut, a Reuters poll showed, but analysts see further easing in monetary conditions during the first half.

Eleven out of 14 analysts polled by Reuters expect both the repurchase and reverse repurchase rates to be left unchanged at 7.50% and 9.50%, respectively, this week.

Two analysts expected the central bank to cut both rates by 25 basis points (bps), while one predicted the monetary authority to cut only the reverse repurchase rate by 25 basis points.

Thirteen analysts expected the Central Bank to keep commercial banks’ Statutory Reserve Ratio (SRR) steady at 8%, while one predicted a 50-basis-point cut.

In December, the Central Bank surprised markets by cutting both rates by 25 bps, the country’s first easing in nearly two years, lowering them from three-year highs to boost faltering economic growth as inflation pressures were expected to ease.

Growth is expected to have slowed to 6.5% last year from a record 8.3% in 2011. The central bank forecasts expansion of 7.5% this year.

“We believe the 25 bps rate cut in December to support growth was a pre-emptive move, as inflation remains stubbornly high,” Samantha Amerasinghe, an economist at Colombo-based Standard Chartered Bank, told Reuters.

She said growth-related concerns have emerged following a weaker-than-expected expansion of 4.8% in the third quarter from a year earlier.

“Premature policy easing would risk fuelling inflationary pressures,” Amerasinghe said.

Other analysts said they expect at least another 25 basis points of rate cuts in the first half of the year.

Annual inflation eased to 9.2% in December from a three-month high of 9.5% in November.

The central bank removed a credit ceiling from 1 January to boost growth after it maintained a tight monetary stance in 2012 to keep a lid on inflation and to curb the country’s fiscal and external deficits.

The central bank raised rates twice since last February, allowed rupee exchange rate flexibility, and imposed a credit ceiling after the country saw a record trade deficit than resulted in a negative balance-of-payments gap.

The Government in November said that it expects to meet the fiscal deficit target of 6.2% of the Gross Domestic Product, the level agreed with the International Monetary Fund under the terms of a $ 2.6 billion loan.

The rupee fell 10.7% against the US dollar last year, swelling the cost of Sri Lanka’s imports and adding to inflationary pressures.