CB to stand pat this week, assessing impact of previous hikes

• Policy rates last raised in July in a surprise move
• Credit growth still higher despite early tightening measures
• Policy announcement due on Wednesday

Reuters:  Sri Lanka’s central bank is expected to keep its key interest rates steady on Wednesday, after cutting three times since December to fend off pressure on the fragile rupee currency and curb accelerating credit growth that has pushed up inflation.

All 13 economists surveyed in a Reuters poll expect the central bank to keep its standing deposit facility rate (SDFR) steady at 7.00%, and its standing lending facility rate (SLFR) unchanged at 8.50%.

Softlogic Stockbrokers Research Head Danushka Samarasinghe said the lag effect of previous rate increases meant “the central bank will wait for another month or two before taking any further action.”

Private sector credit growth hit a near four-year high of 28.2% in June, and Central Bank Chief Indrajith Coomaraswamy expects credit growth to slow to 18% by the end of 2016. 

The sizzling credit growth has kept inflation high, though it slowed in August to 4.0% on-year from the previous month’s 5.5%. 

The rupee has come under pressure due to lower interest rates, higher imports, and foreign outflows from government securities last year. But the currency steadied after the central bank raised $1.5 billion from a sovereign bond sale in July. 

The International Monetary Fund (IMF) on Friday welcomed the central bank’s preemptive move to raise policy rates to maintain inflation within its target band. 

The central bank has raised both the SDFR and the SLFR by 50 bps each in February and July. That followed an increase of 150 bps in commercial banks’ statutory reserve ratio (SRR) in December. 

All 13 economists expect the statutory reserve ratio (SRR) to remain at 7.50%.