CB seen keeping rates steady despite pressure on rupee

Reuters: Sri Lanka’s Central Bank is expected to leave its key interest rates steady on Friday, a Reuters poll showed, despite heavy pressure on the rupee from a political crisis that triggered foreign outflows from stocks and Government bonds. 

President Maithripala Sirisena was forced to reinstate Ranil Wickremesinghe as Prime Minister 51 days after sacking him, as his preferred PM, pro-China former President Mahinda Rajapaksa, failed to secure a parliamentary majority. 

An uneasy truce between Wickremesinghe and Sirisena could undermine economic policies, analysts say. All analysts expect the Central Bank of Sri Lanka (CBSL) to leave key rates steady as Wickremesinghe’s Government aims to focus on economic growth, which has been sluggish due to tight policies, ahead of a presidential poll next year and General Election in 2020.  All 10 economists surveyed expected the Central Bank to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) to be left at 8.00% and 9.00% respectively. The Central Bank raised SDFR by 75 bps and SLFR by 50 bps last month, while reducing the statutory reserve ratio (SRR) by 150 bps to 6.00%.  All 10 analysts saw the SRR remaining steady. 

Sirisena’s abrupt change of Prime Minister and his decision to dissolve Parliament, which was later ruled unconstitutional, created panic and uncertainty among investors. 

The Sri Lankan rupee hit a fresh low of 181.85 per dollar on Wednesday while the island-nation’s dollar bonds have also plummeted as foreign investors sell their holdings. The rupee has fallen nearly 5% since the political crisis started on 26 October. It has dropped 18.4% so far this year. 

“Political pressure would be against increasing the rates,” said Softlogic Capital Markets CEO Danushka Samarasinghe. “However, if rates are increased, it will be better for safeguarding foreign investments in the bond market and also might be favourable from a fiscal point of view.” 

Foreign investors have sold a net Rs. 13.7 billion worth of stocks since the political crisis began and about Rs. 56.7 billion worth of bonds between 25 October and 19 December, Bourse and Central Bank data showed. Sri Lanka has seen net outflows of Rs. 149 billion ($821 million) from Government bonds so far this year, Central Bank data showed.