CB seen holding key rates steady today

Reuters: The Central Bank is expected to keep its key interest rates steady at record lows on Friday, a Reuters poll showed, despite pressure on the fragile rupee currency, which fell 9% last year.

Some dealers however said the Central Bank may surprise the markets to signal the International Monetary Fund of its readiness for fiscal consolidation as the country negotiates a loan from the global lender. 

The IMF has urged Sri Lanka to reduce its fiscal deficit, raise Government revenue and improve foreign exchange reserves, which were at $6.3 billion as of end-January, down by almost a third from October 2014 when it touched a record high. 

Nine out of 14 economists surveyed expected the Central Bank of Sri Lanka to keep the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) steady at 6% and 7.50%, respectively.

Three analysts expected a 50 bps increase in both rates. One analyst expected both the rates to be raised by 25 bps each, while another expected them to be cut by 25 bps.

All 14 economists expected the Statutory Reserve Ratio (SRR) to remain unchanged.

“A rate hike could slow down the credit growth and cool off the monetary system. And also it would create an automatic defence against further rupee weakening,” said Danushka Samarasinghe, Research Head at Softlogic Stockbrokers. 

Since the Central Bank in April 2015 surprised markets with a 50-bps rate cut to spur economic growth, Sri Lanka saw a 27% growth in private sector credit in November 2015 from a year earlier, compared with 13.9% growth in March last year. 

Since a 150-basis-point rise in SRR was announced on 30 December, yields on T-bills have risen between 63 and 76 basis points. However, it has failed to relieve pressure on the rupee 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 by the Central Bank, currency dealers say. 

Instead, rupee forwards, which are trading at around 144.50 to a dollar, have been active since 27 January. 

Economists say the Government has little fiscal options to keep the currency stable as it promised significant spending increases in the 2016 Budget.