No need to raise interest rates further says Cabraal

(Bloomberg): Sri Lanka doesn’t need to further tighten monetary policy for now even though an increase in fuel and transportation costs and a weakening currency may stoke inflation, the head of the central bank said.

The central bank’s rate increase earlier this month will have a “demand-driven impact” and help moderate inflation, its Governor Ajith Nivard Cabraal said in a telephone interview today. The bank expects the island nation to meet its target of mid-single digit inflation, he said, without giving a timeframe.

 “What we have done is sufficient,” Cabraal said. “It’s a policy package that will bring systemic changes in the right direction.”

Policy makers on Feb. 3 raised benchmark rates for the first time in five years and said they would curtail import- related credit to reduce trade and current-account deficits. The moves will ensure that inflation remains at “mid-single digit levels” in the second half of 2012, they said.

The bank on Feb. 9 also abandoned a currency trading band to help conserve foreign-exchange reserves. Together the policies will help to bring down the trade and current-account deficits, Cabraal said.

Ceylon Petroleum Corp., Sri Lanka’s state oil company, raised petroleum prices from Feb. 12. The price increases led to a 20 percent rise in bus fares, the state-run Daily News reported today.

The benchmark Colombo All-Share Index lost 3.8 percent to 5002.68 at 12:51 p.m. local time, extending eight days of losses and set to close at its lowest level since August 2010, while the Sri Lankan rupee plunged 2.8 percent to 120.10 per dollar, according to Bloomberg data.

Stocks and the rupee slumped last week after Cabraal said policy makers would “intervene” in the currency market through “supply and not based on price.”

Sri Lanka devalued the currency by 3 percent in November to boost exports. The central bank lowered the rupee’s trading band against the dollar on Feb. 3, Feb. 6 and Feb. 9, prior to announcing its removal.

Consumer prices in the capital, Colombo, increased 3.8 percent in January from a year earlier after gaining 4.9 percent in December.

Sri Lanka’s foreign-exchange reserves have dropped by about 25 percent from an unprecedented $8 billion last year, as the central bank sold dollars to defend the local currency.

The dismantling of the trading band came after calls by the International Monetary Fund for a more flexible exchange rate.

The IMF, which has disbursed $1.75 billion from a $2.6 billion program to boost the Sri Lankan central bank’s reserves, said Feb. 3 it endorsed the decision to raise rates and cool credit demand.

The IMF also welcomed “the move toward greater exchange rate flexibility,” Koshy Mathai, the lender’s resident representative in Colombo, said in a Feb. 9 e-mail.