CB seen holding rates, SRR steady

The outcome of the June Monetary Policy Review will be made public on Tuesday and a Reuters’ poll yesterday suggest the Central Bank to hold rates, and the SRR unchanged.

Reuters said the Central Bank is expected to keep commercial banks’ Statutory Reserve Ratio (SRR) unchanged at eight percent, according to 11 out of 13 analysts polled and leave its repurchase rate and reverse repurchase rate steady at seven percent and 8.5 percent respectively for a fifth straight month, according to all 13 analysts.

The Central Bank warns about demand-driven inflationary pressures. The International Monetary Fund on Friday asked the bank to be on the lookout for signs of overheating, though the global lender said there were no signs of demand-driven inflation yet.  Inflation will continue to slow in June on improving food supply as the island’s agricultural production gradually recovers from flooding. Annual inflation in May was 8.8 percent versus 9.8 percent in April.

The Central Bank’s accommodative monetary policy is aiming for estimated record growth of 8.5 percent this year as the $50 billion economy attracts more investment after the end of its long civil war in 2009.

Private sector credit growth cools after hitting 30.1 percent in March year-on-year mainly due to a lower base in the previous year.

The central bank allows the rupee to appreciate further to curb imported inflation, despite the IMF asking it to allow flexibility in both directions.

The central bank gradually raises yields in benchmark 91-day T-bills, which have now risen to a five-month high of 7.11 percent, to signal the market on possible policy tightening to curb any overheating.

Keeping SRR and policy rates steady will boost borrowing, both personal and project-related, as the Central Bank has said the economy still has the capacity to expand without overheating. The move will also boost Sri Lanka’s Colombo Stock Exchange.

Analysts from the following institutions participated: HSBC, Citibank, National Development Bank, Asia Capital, Nations Trust Bank, Commercial Bank of Ceylon, Hatton National Bank, People’s Bank, Bank of Ceylon, Frontier Research, Standard Chartered Bank, SC Securities and TKS Securities.