CB expected to hike key policy rates

Tuesday, 29 March 2016 00:31 - - {{hitsCtrl.values.hits}}

Reuters: The Central Bank is expected to raise its key interest rates by at least by 25 basis points on Tuesday, a Reuters poll showed, as it seeks to reduce downward pressure on the fragile local currency.

Seven out of 13 economists surveyed expect the Central Bank of Sri Lanka to raise both its Standing Deposit Facility Rate (SDFR) and it Standing Lending Facility Rate (SLFR): four expect 50 basis point increases in both rates while two expect 25 basis point increases in both rates. One analyst expects both rates to be raised by 100 basis points.

The Central Bank raised the SDFR and the SLFR by 50 basis points each at its policy meeting last month. This followed an increase in commercial banks’ statutory reserve ratio by 150 basis points in December.

“The correct measure is to raise the rates,” said Danushka Samarasinghe, Research Head at Softlogic Stockbrokers. “It will help cooling off the system and further ease the pressure on the currency.”

However, some dealers say the Central Bank may hold policy until it sees the results of its previous two policy tightening meetings.

Six analysts expect the Central Bank to keep the SDFR and the SLFR steady at 6.50% and 8.00%, respectively.

All 13 economists expect the statutory reserve ratio to remain unchanged at 7.50%.

Some analysts say a rate hike could strengthen Sri Lanka’s position in its negotiations for a loan with the International Monetary Fund (IMF) as it would signal a readiness to stem outflows and consolidate its finances.

The IMF has urged Sri Lanka to reduce its fiscal deficit, raise Government revenue and improve foreign exchange reserves, which were at $6.6 billion as of end-February, down by nearly a third from October 2014 when they touched a record high.

Private sector credit growth by commercial banks, which was as high as 27% year-on-year in November, grew at 25.1% in December, slowing for the first time since August 2014.

While local Treasury bill yields have risen by between 116 and 195 basis points across the curve since the key policy rate hikes in February, the tightening has failed to relieve pressure on the currency.

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 144.00 per dollar, but banks are reluctant to trade below the 144.00 level amid moral suasion from the Central Bank, currency dealers say. The one-week rupee forward has been trading at around 147.80 to the dollar since 27 January.