Sri Lanka's central bank likely to keep rates steady

Sri Lanka's central bank (CB) is expected to keep its key policy interest rates unchanged at record lows on Monday, a Reuters poll showed.

The central bank in April surprised markets with a 50 basis point cut to boost economic growth. Until April, rates were steady for 14 months.

Eleven out of 12 analysts said they expected the central bank to leave the repurchase rate or standing deposit facility rate (SDFR) at 6.00 per cent, the reverse repurchase rate or standing lending facility rate (SLFR) at 7.50 per cent, and the statutory reserve ratio (SRR) for commercial banks at 6.00 per cent.

One analyst expected the central bank to cut both the SDFR and SLFR by 25 basis points amid heavy government borrowing, though he predicted the central bank will keep the SRR steady.

Sri Lanka's economy grew at an annual 6.4 per cent in the first quarter of this year, the same pace as in the last three months of 2014.

The central bank has forecast 7 per cent growth this year, while the finance ministry sees 7.2 per cent, compared with 7.4 per cent last year.

Analysts say the central bank cut policy rates in April to reduce debt-repayment costs for the government, which is heavily dependent on local borrowing at a time approval of some revenue bills has been delayed.

Sri Lankan shares fell on Friday to near 2-1/2 month lows due to foreign outflows, with diversified and telecommunication companies leading the drop as uncertainty around a parliamentary election hit investor appetite.

Analysts expect the trend to continue until President Maithripala Sirisena dissolves parliament and goes for an election. Sirisena has said he will dissolve parliament once some crucial reforms, including an electoral bill, are passed.

The main stock index (CSE) ended 0.22 per cent, or 15.13 points, lower at 7,016.20, its lowest since April 15.

Turnover stood at 861.3 million rupees ($6.4 million), less than this year's daily average of about 1.1 billion rupees.

The market saw net foreign outflows of 460.3 million rupees on Friday, extending net foreign outflows over the past 23 sessions to 4.09 billion rupees in stocks.

"Foreigners are selling due to global redemptions, expectations of a Federal Reserve rate hike, possible market corrections in frontier and emerging markets and the directionless political scenario unravelling in Sri Lanka," said Danushka Samarasinghe, head of research at Softlogic Securities. (Reuters)