CB seen keeping rates steady after March hike

Tuesday, 9 May 2017 00:36 - - {{hitsCtrl.values.hits}}

Reuters: With pressure on the Sri Lanka’s rupee abating and yields for government securities easing, the country’s central bank will probably keep key interest rates steady at more than three-year highs at a policy meeting on Tuesday, a Reuters poll showed.

The central bank raised rates by 25 basis points on March 24 to counter inflationary pressures after the IMF asked the authorities to stand ready to tighten.

The IMF this week said its executive board was likely to consider in June Sri Lanka’s request for the completion of a second loan review, a requirement for disbursing a third tranche of aid.

Fifteen out of 16 economists surveyed predicted the central bank would keep its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.25%

and 8.75%, respectively.

The lone outlier expected a 25-basis-point hike in both rates.

All 16 economists expected the statutory reserve ratio (SRR) to stay at 7.50%.

“It is too soon to go for another rate hike. The earlier rate hike effects are yet to get incorporated into the economy,” said Yohan Samarakkody, head of research at SC Securities.

Sri Lanka’s consumer prices rose 6.9% in April from a year earlier, slowing from the previous month’s record high of 7.3%.

Yields in short term government securities have fallen 26-28 basis points in the last two weekly auctions as investors expect bearish pressure on the rupee currency to ease once inflows from borrowings to arrive, analysts said.

The government plans to raise up to $1.5 billion from a sovereign bond issue and around $1 billion from two separate syndicated loans, while it has also doubled the borrowing limit through Sri Lanka development bonds (SLDB) to $3 billion.

The Sri Lankan rupee fell 3.9% in 2016 and has eased around 1.8% so far this year, pressured by dollar demand from importers and foreign investors’ withdrawing from government securities in the first three months.

The central bank quit defending the rupee after it missed a end-December reserve target set by the International Monetary Fund in return of a $1.5 billion loan.

It has tightened monetary policy four times since December 2015 to fend off pressure on the fragile rupee and curb stubbornly high credit growth that has pushed up inflation as Sri Lanka faced twin crisis of balance of payments and debt.

The tightening has dragged on the economy, which grew at a slower 4.4% annual pace in 2016 compared to 4.8% a year-before.

Private sector credit grew 21% in February from a year earlier, up from January’s 20.9%. However, it has eased from a near-four year high of 28.5% hit in July.