CB seen holding rates steady after SRR hike

Reuters: Sri Lanka’s Central Bank is expected to keep its key interest rates steady at record lows on Monday, a Reuters poll found, after it raised commercial banks’ statutory reserve ratio (SRR) by 150 basis points from 16 January in a bid to relieve pressure on the fragile rupee. 

The rupee closed at 144.00/144.20 per dollar on Friday, near its record low of 144.30, on importer dollar demand. 

Six out of 11 economists surveyed expected the Central Bank of Sri Lanka to keep the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) steady at 6.00% and 7.50%, respectively.

Three analysts expected a 25 bps rise in both rates. One analyst expected both rates to be raised by 100 bps each, while another expected them to be hiked by 50 bps.

All 11 economists expected the SRR to remain unchanged.

“If the central bank wants to ease the pressure on the rupee, it must raise the policy rates,” said Danushka Samarasinghe, research head at Softlogic Stockbrokers.

The rupee, which fell 9% last year, has been under pressure due to lower interest rates, higher imports, and foreign outflows from government securities. 

The Central Bank allowed free float of the currency, but defended it in the face of volatility due to thin trade, dealers say.

Economists said the government had little fiscal options to help keep the currency stable as it had promised a lot of spending in the 2016 budget. 

The central bank in April 2015 surprised markets with a 50-bps rate cut to spur economic growth and boost consumer prices. Until then, it had held rates steady for 14 months. 

Since then the island nation has witnessed a 26.3% growth in private sector credit in October 2015 from a year earlier, compared with 13.9% growth in March last year. 

Sri Lanka’s economy grew 4.8% in the third quarter of last year compared with the same period a year earlier, slowing from 6% in the second quarter. 

Finance Minister Ravi Karunanayake in his 2016 budget speech in November estimated the economy would expand 6% this year and aimed to achieve annual growth of 7-8% during the next few years.