CB seen keeping rates steady for fifth straight month

Reuters: The Central Bank is expected to keep interest rates steady for a fifth straight month on Tuesday despite high inflation to help bolster economic growth, which has been cooling due to sweeping policy measures and an extended drought.

Twelve out of 13 analysts polled by Reuters expect the repurchase and reverse repurchase rates to be left unchanged at 7.75 per cent and 9.75 per cent, respectively. Both rates are at their highest in more than two years. One analyst expected the Central Bank to raise both rates by 25 basis points.

All the analysts surveyed expect commercial banks’ statutory reserve ratio (SRR) to be left unchanged at eight per cent.

The Central Bank has already raised the key policy rates twice since February, allowed a flexible exchange rate, and limited this year’s credit growth to prevent twin deficits in trade and balance-of-payments.

Samantha Amerasinghe, Economist at Colombo-based Standard Chartered Bank, said rising inflationary pressures seem to be dissipating now with food inflation contracting due to improvements in supply.



“However, as headline inflation is still expected to hover around double-digits as we approach year-end, we feel the Central Bank has limited scope for monetary easing to stimulate growth. A rate cut might be a likely scenario in Q1-2013 with inflation expected to moderate by then,” she told Reuters.

Inflation eased to 9.5 per cent in August from a year earlier from a 42-month high of 9.8 in July on improved food supply.

Central Bank Governor Ajith Nivard Cabraal said last month there was no need for a monetary policy response to accelerating inflation which he attributed largely to supply constraints following the drought.

Though repo and reverse-repo rates were raised by 75 and 125 bps, respectively since February, the yields in Treasury bills have risen between 276-441 bps in the same period.

The rupee has fallen more than 16.5 per cent against the US dollar since November, swelling the cost of Sri Lanka’s imports.

Treasury Secretary P.B. Jayasundera on 6 September told a Reuters forum that Sri Lanka’s economic growth this year may range between 6.7 per cent and 7.2 per cent depending on the impact of a drought that has lasted since the beginning of the year.

The International Monetary Fund has also lowered its forecast for Sri Lanka’s economic growth to 6.75 per cent this year from an earlier estimate of 7.5 per cent and less than the Central Bank’s 7.2 per cent.