CB may keep rates steady as inflation, credit growth eases

Monday, 28 November 2016 00:20 - - {{hitsCtrl.values.hits}}

Reuters: Sri Lanka’s central bank is expected to keep its key interest rates steady on Tuesday, a Reuters poll showed, amid slowing inflation and credit growth after past tightening measures. The Central Bank has already tightened its monetary policy stance three times since December, to fend off pressure on a fragile rupee currency and curb stubbornly high credit growth that has pushed up inflation.

Nine out of 13 economists surveyed in the poll expect the central bank to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.00% and 8.50%, respectively. One economist expected a 50-basis-point hike in both policy rates while three expected a 25-bps hike. All 13 economists expect the statutory reserve ratio (SRR) to stay at 7.50%.

“With inflation still fairly low, we think there’s a good chance that rates will be left on hold again this month,” said Oliver Jones, assistant economist at Capital Economics Ltd.

“But inflation is set to pick up now that value-added tax (VAT) has been raised back to 15%, and the election of Donald Trump in the US arguably increases the chances of fiscal loosening in the US, which might prompt the Fed to raise interest rates aggressively next year, putting the rupee under pressure.”

He said it will not be too long before the central bank resumes its tightening cycle.

But analysts said tight fiscal policies could mean the central bank has room to hold off from raising interest rates next year.

Meanwhile, the rupee has come under pressure because of lower interest rates, higher imports, and foreign outflows from government securities last year.

The currency is under pressure due to dollar demand from importers who fear the economic policies of US President-elect Donald Trump could lead to a rise in the greenback and interest rates.

Dealers said foreign investors might pull out of emerging markets, including Sri Lanka, if the US Federal Reserve raises interest rates next month.

The International Monetary Fund (IMF) said on Saturday that Sri Lanka’s macroeconomic and financial conditions have begun to stabilise and the island nation’s performance under its $ 1.5 billion loan program is satisfactory.

The central bank has raised both the SDFR and the SLFR by 50 bps each in February and July. That followed an increase of 150 bps in commercial banks’ SRR in December.