CB may surprise with rate hike?

• Six out of 13 analysts predict a rate hike
• Rupee under downward pressure on imports, foreign outflow
• Credit growth responds to past tightening; economic growth slows
• Policy announcement due on Tuesday, 7  Feb. 

Colombo (Reuters): The Central Bank could raise its key policy rates in coming months if it skips a chance to tighten this week, a Reuters poll showed, underlining renewed pressure on the rupee after the Federal Reserve’s rate hike last month.

The Central Bank has already raised its benchmark rates  three times since December 2015 to fend off pressure on the fragile rupee and curb stubbornly high credit growth that has pushed up inflation.

The tightening has dragged on the economy, which grew at a slower 4% annual pace in the first nine months of 2016 compared to 5.7% in the same period the year-before. 

Policymakers face a tricky balancing act as the rupee comes under fresh selling pressure, hurt by capital outflows thanks to the Fed’s more hawkish policy outlook and uncertainty caused by US President Donald Trump’s policies on trade, immigration and international relations. 

That uncertainty was reflected in the Reuters poll showing economists were split on their views. Seven out of 13 economists surveyed predicted the Central Bank will keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.00% and 8.50%, respectively.

However, three economists expected a 50-basis-point hike in both policy rates while the rest tipped a 25-basis-point hike.

All 13 forecasters expect the statutory reserve ratio (SRR) to stay at 7.50%.

“The Central Bank will be weighing up the trend in credit growth towards the end of 2016,” said Shiran Fernando, an analyst at Colombo-based Frontier Research, signaling policymakers could move either way depending on where they see the greatest risks for the economy.

The Sri Lankan rupee fell 3.9% in 2016 and has eased around 0.3% so far this year, pressured by dollar demand from importers and foreign investors’ exiting from government securities. 

Private sector credit grew 22% in October from a year earlier, slowing from September’s 25.6% and easing from a near-four year high of 28.5% hit in July.  Sri Lanka’s consumer prices rose to a six-month high of 5.5% in January from a year earlier, accelerating from the previous month’s 4.5% under a revised calculation method.

The government revised the base year and the composition of market basket of the Colombo Consumer Price Index (CCPI) with effect from January to reflect changes in the market. 

The Central Bank has raised both the SDFR and the SLFR by 50 bps each in February and July 2016. That followed an increase of 150 bps in commercial banks’ SRR in December.