Sri Lanka’s Central Bank is expected to raise interest rates by 25 basis points from record lows at its policy meeting today, a Reuters poll found, a move that could relieve pressure on the fragile rupee.
The rupee closed at a record low of 143.95/144.05 per dollar yesterday, hit by dollar demand from importers.
Six out of 11 economists surveyed expected the Central Bank of Sri Lanka to raise the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) by 25 basis points to 6.25 percent and 7.75 percent respectively.
It will be the first increase since February 2012, should the Central Bank raise rates today.
All 11 economists predicted the statutory reserve ratio (SRR) for commercial banks would remain unchanged at 6.00 percent.
Four economists expected the rates to be left steady, while one expected the Central Bank to raise SDFR and SLFR by 50 basis points (bps) each.
“If they want to maintain the currency, they will have to raise the policy rates,” said Danushka Samarasinghe, research head at Softlogic Stockbrokers.
Sri Lanka has to raise rates to guard against outflows from the pressure of higher U.S. rates and cooling economic growth.
Economists said the government had little fiscal options to help keep the currency stable as it had promised a lot of spending in the 2016 budget.
Sri Lanka early this month passed its 2016 Budget with a series of amendments due to public protests that could derail the government’s attempts at fiscal consolidation.
The Central Bank in April surprised markets with a 50-bp cut to spur economic growth and boost consumer prices. Until then, it had held rates steady for 14 months.
Since then the island nation has witnessed a 22.2 percent growth in private sector credit in September from a year earlier, compared with 13.9 percent growth in March this year. The Central Bank floated the currency on Sept. 3 after heavily defending it.
Since then the currency has fallen 6.4 percent and economists say lack of monetary and fiscal policy tightening led to the steep fall, apart from the strong dollar. The International Monetary Fund in September said that the key policy rates were not “necessarily inappropriate”.
Sri Lanka’s economy grew 4.8 percent in the third quarter of this year compared with the same period a year earlier, slowing from 6 percent in the second quarter.
Finance Minister Ravi Karunanayake during his 2016 Budget speech last month estimated the economy would expand 6 percent this year and aimed to achieve annual growth of 7-8 percent during the next few years.
Rupee hits record closing low ahead of rate decision
REUTERS: The Sri Lankan rupee closed at a record low yesterday as dollar demand from importers weighed on the local currency and as investors waited for the Central Bank’s decision on interest rates, dealers said.
The rupee closed at 143.95/144.05 per dollar, down from Monday’s close of 143.90/144.
“A private bank sold dollars to prevent further depreciation. But we don’t know if it was done due to Central Bank direction or a genuine exporter conversion,” a currency dealer said on condition of anonymity.
Officials at the Central Bank were not available for comment.
The currency has fallen 6.4 percent since the central bank allowed free float of the rupee on Sept. 4, and it is expected to weaken further in 2016 due to lower reserves and higher imports, say currency dealers.
The rupee has fallen 8.9 percent so far in the year.
The currency may however strengthen if foreign exchange inflows increase, dealers said.
Finance Minister Ravi Karunanayake told Reuters last week that Sri Lanka is expected to get $1 billion from offshore investors within a month, a move that could boost the island nation’s faltering reserves.
Commercial banks parked Rs.78.2 billion of surplus liquidity yesterday using the Central Bank’s deposit facility at 6 percent, official data showed.
Comments - 0
Comments will be edited (grammar, spelling and slang) and authorized at the discretion of Daily Mirror online. The website also has the right not to publish selected comments.