Reuters - Sri Lanka’s central bank is expected to keep its key interest rates steady at a policy review on Tuesday, after raising them by 50 basis points last month, a Reuters poll showed, amid signs of easing inflation and slower private sector credit growth. The central bank has tightened monetary policy three times since December to fend off pressure on the fragile rupee currency and curb inflation arising from cheap credit.
Eleven of 12 economists surveyed expect the central bank to keep its standing deposit facility rate (SDFR) steady at 7.00%, and its standing lending facility rate (SLFR) unchanged at 8.50%.
One economist expected the central bank to raise both rates by 50 basis points.
Private sector credit growth is slowing after monetary tightening earlier this year while inflation is also easing. July consumer prices rose 5.5%, slowing from a 32-month high of 6.0% in June after the government raised the value added tax (VAT) to tackle a soaring deficit.
However, the VAT increase has been halted by two Supreme Court rulings.
“The central bank will not rush in to making revisions. Last month’s policy rate increase has provided an indication of current market rates to remain during the next 12 months or so. Therefore rate stability can be expected,” said Danushka Samarasinghe, research head at Softlogic Stockbrokers.
He said the central bank wanted credit growth to stay around 20% to avoid overheating.
“We see that target soon becoming reality. Also, the strategy of boosting foreign reserves and mopping up dollar liquidity bode well with maintaining a stable interest rate environment.”
The central bank raised both the SDFR and the SLFR by 50 bps each in February and July from record lows. That followed an increase of 150 bps in commercial banks’ statutory reserve ratio (SRR) in December.
The average weighted prime lending rate (AWPR) has risen 333 bps since the February moves and 376 bps since the SRR hike.
All 13 economists expect the statutory reserve ratio (SRR) to remain at 7.50%.
New Central Bank Governor Indrajith Coomaraswamy said last month the monetary authority was compelled to raise the rates because of stubbornly higher credit growth.
The IMF has urged Sri Lanka to reduce its fiscal deficit, raise government revenue and improve its foreign exchange reserves, which were at $6.5 billion as of end-July, down by more than a third from October 2014.
The rupee has come under pressure due to lower interest rates, higher imports, and foreign outflows from government securities last year. But the currency steadied after the central bank raised $1.5 billion from a sovereign bond sale early this month.