CB says no policy rate cut likely in near term

• No change in rupee trading band seen likely
• To absorb exchange rate shocks, ease volatility
• Gold reserves have gained about 65% – Governor

By Shihar Aneez

Reuters: Sri Lanka is unlikely to cut its already low monetary policy rates in the near term, but may gradually reduce them over the medium to long term to spur a pro-growth policy, the Central Bank Governor said on Wednesday.

Sri Lanka has since January kept rates at the lowest level in six years, hoping to spur record growth of 8.5 per cent in the $50 billion economy this year, which has been surging since the end of a three-decade civil war in May 2009.  “In the medium to long term, there is a possibility of a rate reduction, but it will be in a very, very gradual manner,” Central Bank Governor Ajith Nivard Cabraal told Reuters while visiting the central Sri Lankan town of Rambukkana.

“In near term, I don’t see too much scope for a rate reduction.”

The repurchase rate is at seven per cent while the reverse repurchase is at 8.50 per cent. Sri Lanka has generally gone the opposite way of many of its Asian peers, loosening policy and capital controls amid the global financial crisis.

The island nation expanded 7.9 per cent in the first quarter, despite flooding that hit local crops hard. Tourism, telecommunications, port activities and a robust external sector have spurred second-quarter growth, he said.

“All the indicators point to an eight per cent plus growth in the second quarter and we are more confident in achieving 8.5 per cent growth this year than earlier,” he said, adding that inflationary risks have eased.

Economists have warned of a risk of demand-led inflation, but so far the government has seen little sign of it despite a surprise rise in July.

Cabraal said that despite the recent round of uncertainty since Standard and Poor’s downgraded the credit rating of the United States and set global equity markets tumbling, Sri Lanka would still manage the rupee exchange rate.

“Shocks will be absorbed by us,” Cabraal said. “We will maintain the rupee stability when the rest of the world is in volatility.”

The International Monetary Fund, which has given Sri Lanka a $ 2.6 billion loan to boost reserves, has repeatedly asked the Central Bank to allow more flexibility in the exchange rate, but the Central Bank has balked.

Using two State-owned banks, the Central Bank maintains a rupee trading band designed to prevent rapid swings in the rate. The band on Wednesday stood at 60 cents or Rs. 109.20/80 to the dollar.

“There is not much of a reason to expand the band as we shift it accordingly,” Cabraal said.

Cabraal also said that the Central Bank has seen its reserves climb along with the record price of gold, having bought in when the price was near $ 1,100 an ounce last year, Cabraal said. He declined to give the quantity.

“We are sitting on a fairly big reserve of gold and prices have risen 65 per cent,” since the purchase, he said.