CB expected to keep policy rates steady

Reuters - Sri Lanka’s central bank is expected to keep its key interest rates steady for a third straight month on Friday, a Reuters poll showed, having tightened policy twice since December to fend off selling pressure on the fragile rupee currency. Nine out of 10 economists surveyed expect the central bank to keep its standing deposit facility rate (SDFR) steady at 6.50%, and its standing lending facility rate (SLFR) unchanged at 8.00%. One economist expects both rates to be raised  by 50 basis points each. 

The central bank raised both the SDFR and the SLFR by 50 basis points each at its policy meeting in February from their record lows. This followed an increase in commercial banks’ statutory reserve ratio by 150 basis points in December.

“What should be done is the policy rates should be increased, which in turn will support the local currency and keep inflation at bay,” said Danushka Samarasinghe, research head at Softlogic Stockbrokers.

“But considering what the monetary policy stance has been in recent month, the central bank may keep the policy rates unchanged in order to support economic growth.”

All 10 economists expect the statutory reserve ratio (SRR) to remain unchanged at 7.50%.

Analysts expect pressure on the rupee to ease in June, helped by inflows from an International Monetary Fund loan. The global lender reached agreement with the Sri Lankan government for a $1.5 billion bailout to help the island nation avert a balance of payments crisis. 

The IMF has urged Sri Lanka to reduce its fiscal deficit, raise government revenue and improve foreign exchange reserves, which were at $6.1 billion as of end-April, down by a third from October 2014 when they touched a record high.

Private sector credit growth by commercial banks accelerated to 26.5% year-on-year in February from 25.7% in January. 

The rupee has come under pressure due to lower interest rates, higher imports, and foreign outflows from government securities.

The spot rupee is hovering at 145.70 per dollar, but banks are reluctant to trade below this level due to subtle pressure from the central bank, currency dealers say. The spot-next or five-day rupee forward has been trading around 147.00 to the dollar since Jan. 27.