Sri Lanka holds key interest rates at record lows
Sri Lanka's central bank held key interest rates at record lows on Friday, and said continued private credit growth will support the economy even as analysts warned that policy could be tightened later this year to take pressure off a beleaguered rupee currency.
The central bank, which surprised markets with a 50 basis point cut in April after holding rates steady for 14 months, left the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) unchanged at 6.00 per cent and 7.50 per cent, respectively.
The commercial banks' statutory reserve ratio was also unchanged at 6.00 per cent. A Reuters poll had correctly predicted the on-hold decision.
"Given continued low market interest rates, it is projected that private sector credit would increase further in the period ahead supporting the growth momentum of the economy," the central bank said in its monetary policy statement.
However, analysts note the bank is walking a tight rope as it seeks to boost an economy partly hit by stalled projects amid corruption probes, and ensuring its policy doesn't put more pressure on a weak rupee and wreak havoc on the balance of payments position.
"The government will have to look into tightening the monetary policy after the elections if it canít get cheaper foreign debt and foreign direct investments due to heavy pressure on the rupee," said Danushka Samarasinghe, research head at Softlogic Stockbrokers. Latest figures available show the overall BOP at a deficit of $692.1 million in the first two months of 2015, compared to a surplus of $809.9 million in the same period last year.
A parliamentary election expected around July-August has slowed foreign investments even as the new government, led by Maithripala Sirisena, which came to power after a Jan. 8 election has pledged to restore investor confidence damaged by ex-President Mahinda Rajapaksa's policies.
The central bank has estimated 2015 economic growth at 7 per cent, down from last year's 7.4 per cent as government-led construction and private investment slowed in the first quarter amid corruption probes.
The central bank said the rupee, which it manages around a tight trading band, has depreciated 2 per cent so far this year. It has allowed 0.6 per cent or 80-cent fall since April 30 to account for broad gains in the dollar and rising credit demand in a low rate environment.
Private sector credit grew 13.9 per cent on-year in March from 12.6 per cent in February, while annual inflation in April was steady at a record low of 0.1 per cent.
Meanwhile, Sri Lankan rupee forwards traded steady on Friday after the central bank kept key policy rates unchanged, but dealers said the currency would face pressure until either dollar inflows pick up or interest rates rise. (Reuters)
