CB seen keeping rates steady; easing tipped in May/June

Reuters: The Central Bank is expected to keep key monetary policy rates steady on Tuesday, a Reuters poll showed, but analysts predict at least a quarter percentage point cut in May or June after the country’s Treasury Secretary signalled an easing bias for rates.

Eight out of 14 analysts polled by Reuters expect the Central Bank’s repurchase and reverse repurchase rates to be left unchanged at 7.50% and 9.50%, respectively, while five predicted a 25 basis point (bps) cut in both.

One analyst expected a 50 basis point cut in both rates.

All analysts surveyed predicted the bank would keep commercial banks’ statutory reserve ratio (SRR) steady at 8%.

“Concern on inflation still remains. Inflation has just fallen only one month and we need to see how it moves after the increase in electricity tariff,” said Samantha Amerasinghe, an economist at Colombo-based Standard Chartered Bank. “So it is premature for a rate cut now and I expect the Central Bank to be cautious.”



Sri Lanka’s year-on-year inflation rate in March eased to 7.5% from a near-record high of 9.8% a month ago due to the improved supply of vegetables.

The Central Bank expects inflation to ease further in April due to a higher base effect.

“We will see a slight decline in the level of inflation. It will be between 7.0-7.5%,” Swarna Gunaratne, the Central Bank’s Chief Economist, told Reuters on Friday.

Treasury Secretary Dr. P.B. Jayasundera on Tuesday said Sri Lanka’s official interest rates are expected to decline during May and June as the borrowing needs of loss-making State-run energy enterprises recede.

Sri Lanka is considering raising electricity tariffs later this month, having hiked diesel and gasoline prices twice since December due to the colossal losses of State-run energy firms.

Economists and analysts expect inflation to remain at higher levels in the coming months due to the expected second round effects of price hikes in electricity and fuel.

The International Monetary Fund in February said high inflation may limit the room for near-term monetary easing and constrain the $ 59 billion economy’s recovery.

The IMF also has warned that Sri Lanka faces slowing economic growth, lower tax revenue and high borrowing.

The Central Bank has acknowledged that tough monetary policy measures and a flexible exchange rate it adapted last year have curbed economic activity.

Economic growth slowed to 6.4% last year from a record 8.2% in 2011. The Central Bank forecasts an expansion of 7.5% this year, higher than the IMF’s 6.25% estimate.

In December, the Central Bank surprised markets by cutting both money market rates by 25 bps, its first easing in nearly two years, lowering them from three-year highs to boost faltering economic growth as inflation pressures were expected to ease.