Central Bank seen keeping rates steady

Wednesday, 12 December 2012 00:07 - - {{hitsCtrl.values.hits}}

Reuters: The Central Bank is expected to keep interest rates steady for an eighth straight month on Wednesday, a Reuters poll showed, but may consider easing monetary conditions early next year, similar to many of its peers in Asia.

All 13 analysts polled by Reuters expect the repurchase and reverse repurchase rates to be left unchanged at 7.75% and 9.75% respectively. The two benchmarks are at their highest in more than three years.

One analyst expected the Central Bank to cut commercial banks’ Statutory Reserve Ratio (SRR) by 25 basis points in a modest step to support growth, which is expected to slow down to 6.8% this year from a record 8.3% in 2011.

While central banks from Australia to Thailand have eased policy this year to counter the global slowdown, Sri Lanka has maintained a tight monetary stance to keep a lid on inflation and to curb the country’s fiscal and external deficits.

Since February, it has raised rates twice, 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 last month said that it expects to meet the fiscal deficit target of 6.2% of Gross Domestic Product, the level agreed with the International Monetary Fund under the terms of a $ 2.6 billion loan.

Sri Lanka’s inflation rate in November surprisingly rose to a three-month high of 9.5% from a year earlier after heavy rain pushed up prices of vegetables and other food.

Central Bank Governor Ajith Nivard Cabraal said annual inflation may be steady at 9.5% in December year-on-year.

“We adjusted the prices for good reason,” Cabraal told Reuters, referring to the Government’s decision to pass upward price revisions in global fuel prices and imports to consumers from early 2012. “But we know for sure it is not as a result of the demand. There was no risk from the demand side as we had imposed a credit ceiling.”

Samantha Amerasinghe, an Economist at Colombo-based Standard Chartered Bank, projects inflation could ease in 2013, which would help the Central Bank to loosen monetary policy.

“Headline inflation is likely to inch higher in Q4 2012 due to upward revisions of administered prices of fuel and supply-side constraints. Hence, it is too early for a rate cut in December,” she said.

The rupee has fallen more than 14.3%against the US dollar since November last year, swelling the cost of Sri Lanka’s imports and adding to inflationary pressures.