CB says rates appropriate, but stands ready to change

Tuesday, 4 June 2013 01:05 - - {{hitsCtrl.values.hits}}

Reuters: Sri Lanka’s key policy rates are appropriate after two cuts since December, but the Central Bank is ready to act if needed if there are any major changes in the macroeconomic outlook, Central Bank Governor Ajith Nivard Cabraal told Reuters yesterday.

Sri Lanka’s monetary authority unexpectedly cut both repurchase and reverse repurchase rates by 50 basis points last month to 7% and 9% respectively to one-year lows after trimming them by the same margin in December.

“We want to see that there is no unnecessary inflationary pressure building up in the economy,” Cabraal told Reuters in an interview. “Unless there is major movement in next few months, we think that it (the policy interest rate) is appropriate, but we stand ready to change if we find that is necessary.”

After the latest easing, Cabraal said the Central Bank expected an improvement in credit growth and foreign investment, and a decline in market interest rates: “At the moment, the current interest rates seem to be supportive of that. If that continues, then we may not see a change (in policy rates).”

The Central Bank is expected to announce this month’s monetary policy rates on 14 June. The Central Bank went ahead with the recent rate cuts despite a warning from the International Monetary Fund against policy easing due to concerns it could stoke inflationary pressures.

Cabraal, in justifying the decision, said the move would help boost the economy, after a slower-than-expected pick-up in activity in the first few months of 2013. “In the first quarter, we will have a slightly lesser number than what we had last year. But we are maintaining the 7.5% economic growth target (for all of 2013). Some of the steps we have taken will probably give impetus to the economy.”

Official growth data for this year’s first quarter will be released by mid-June. The Central Bank’s 2013 growth estimate is much higher than IMF’s 6.3%. Economic growth cooled to a three-year low of 6.4% last year, from a record expansion of 8.2% in 2011.

Sri Lanka’s annual inflation accelerated to 7.3% in May year-on-year from 6.4% a month ago, mainly due to an increase in electricity tariffs. But Cabraal said inflation would moderate from June and expected the country to achieve the estimated target of around 7% for 2013.

“There may be one or two spikes here and there. But by and large, the trend would be downwards from this month. We think that inflation towards the end of the year should stabilise around mid single digits that’s we are aiming for.”