CB seen keeping rates steady: Reuters Poll

The Central Bank is expected to keep interest rates steady for a fourth straight month on Tuesday as a spike in inflation to a 42-month high complicates its efforts to bolster cooling growth.

All 11 analysts polled by Reuters expected repurchase and reverse repurchase rates to be left unchanged at 7.75% and 9.75% respectively. Both rates are at their highest in more than two years.

All the analysts expect commercial banks’ statutory reserve ratio to be left unchanged at 8%.

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

But high inflation, fed by an ailing rupee and drought sweeping the food grain growing parts of the island nation, limits room for monetary easing.

“I am concerned about the rise in core inflation, though the central bank may not raise the policy rates at this moment,” said Amal Sandaratne, Chief Executive at Colombo-based Frontier Research.

Core annual inflation, which excludes volatile food and energy prices, rose to a 10-month high of 6.0% in July from 5.8% a month earlier.

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

Since February the Central Bank has raised policy rates twice to their highest level in more than two and half years, restricted credit and allowed a more flexible exchange rate to avert a balance-of-payments crisis.

The rupee has fallen over 16% against the US Dollar since November, swelling the cost of Sri Lanka’s imports.

Though repo and reverse-repo rates were raised by 75 and 125 basis points respectively since February, the Central Bank has allowed the yields in Treasury bills to rise between 267-416 basis points in the same period.