REUTERS: Sri Lanka’s Central Bank does not see a need for a rate rise due to lower core inflation, but the monetary authority is cautiously monitoring the numbers, Governor Dr. Indrajit Coomaraswamy told Reuters on Tuesday.
The governor’s comments came three weeks after the Central Bank revised down its economic growth for 2017 after holding key interest rates steady at as it focuses on supporting a faltering economy hit by extreme weather.
The standing deposit facility rate (SDFR) stands at 7.25 percent and standing lending facility rate (SLFR) at 8.75 percent. The last rise, of 25 basis points, was in March.
Coomaraswamy said there was “not yet” a need for another rate hike. The Central Bank’s monetary board will announce the key next monetary policy rate on December 28.
“If we see rise in core inflation or if we see wage pressure coming from headline inflation, then we will have to act. Headline inflation rate is high, but core inflation is low.
If the headline inflation stays high for sometimes, then it can feed through to wages,” he told Reuters on the sideline of an investment forum in Colombo.
“We are watching it very carefully. It will be very much of data-driven approach. Data means the data we can control.”
Headline inflation accelerated a record 7.8 percent last month from a year earlier, up from the previous month’s 7.1 percent. But core inflation, which excludes fresh food, energy, transport, rice and coconuts, was at 5.8 percent in October easing from the previous month’s 6 percent.
The Central Bank on November 7, as widely expected, kept the key policy rates steady at their more-than four-year highs.
Since December 2015, both rates have been raised by 125 bps. The separate Statutory Reserve Ratio was increased 150 bps. Those measures, as well as a tightening of fiscal policy, have dragged on growth, with gross domestic product (GDP) expanding just 3.9 percent in the first half of this year.
Coomaraswamy, after the monetary policy announcement early this month, revised down the economic growth to between 4 percent and 4.5 percent this year, slower than the earlier target of 4.5 percent.
Analysts say the Central Bank is now focusing more on stoking GDP growth than taming credit, with the economy expected to see weaker momentum due to floods and drought.
The Central Bank has had to balance the need to temper price pressures to support an economy hit by extreme weather. The country was hit by the most severe drought in 40 years in the first quarter and the worst flooding in 14 years in May.
Coomaraswamy also said the island nation’s borrowing cost was “likely” to rise with any increase in US interest rate as the world’s largest economy is now looking at tightening the monetary policy.
However, he said, Sri Lanka had an opportunity to reduce the cost of borrowing by maintaining robust economic conditions and fiscal consolidation which could result in compressing large margin between the US interest rate and local interest rate.
Sri Lanka is facing a debt crisis with the repayment cycle of expensive infrastructure foreign loans starting next year. The US $ 81 billion economy has to repay over US $ 5 billion in the next 12 months while the country has just over US $ 7 billion in foreign exchange reserves, official central bank data showed.