CB seen holding key rates steady ahead of budget

Reuters: Sri Lanka’s central bank is expected to keep its key interest rates steady on Tuesday to support the sluggish economy despite a pick-up in inflation amid strong credit growth, a Reuters poll showed.

All 11 economists in the survey predicted the central bank would keep its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.25% and 8.75%, respectively. 

Both rates are at more than four-year highs after being raised four times since December 2015 to tamp down inflation and support the sliding rupee currency.

The analysts also forecast the statutory reserve ratio (SRR) would be kept steady at 7.50%.

The International Monetary Fund said in September that the central bank should “stand ready to head off pressures on inflation and credit growth”.

Central Bank Governor Indrajit Coomaraswamy had expected the economy to grow by around 4.5% this year, only marginally better than in 2016.

But the previous rate increases and tight fiscal policies have dragged on activity. Gross domestic product (GDP) rose 3.9% in the first six months of 2017 from a year earlier.

“With the governor being more growth focused, we do not expect any change in the policy rates,” said Trisha Peries, an analyst at Colombo-based Frontier Research.

“Inflation could be the main concern when they decide the rates in the first quarter of next year.”

Rates on treasury bills have fallen between 94-165 basis points since end-April, mainly driven by foreign buying in t-bonds, which could be good for the economy but may also add to inflationary pressures.

Higher borrowing costs have had some impact, with annual private sector credit growth slowing to 18% in August this year from a near four-year high of 28.5% hit in July 2016. The central bank has said it wants to curb credit growth to 15%.

Consumer inflation rose to a record high of 7.8% last month from a year earlier, accelerating from the previous month’s 7.1%.

The central bank said in its last monetary policy meeting on Sept. 26 that economic growth continued to be affected by extreme weather conditions and weak exports.

The Sri Lankan rupee fell 3.9% against the U.S. dollar in 2016 and has slipped around 2.7% so far this year, pressured by dollar demand from importers and foreign fund outflows from government securities early in the year on the back of rising interest rates in the United States.

The island nation saw a foreign outflow of 64.2 billion rupees ($417.97 million) from government securities in the first quarter. But that has more than reversed since then, with net inflows of 105.3 billion rupees.