As the private credit growth appears to be recovering, Standard Chartered Bank (StanChart) in a brief research note said it expected no rate changes in the near term given concerns about external stability.
Sri Lanka kept its policy rates unchanged at all-time lows at the latest monetary policy review.
The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) were kept at 6.5 percent and 8.0 percent, respectively.
“We maintain our view that the CBSL will keep policy rates on hold owing to concerns about external stability, despite lower domestic inflation,” StanChart said.
Sri Lanka’s foreign reserves declined to US $ 7.2 billion in January 2015 from US $ 9.1 billion in June 2014, owing to the trade deficit and debt redemptions as Rs.500 million sovereign bond that matured in January was paid using reserves.
“Sri Lanka has external debt redemptions of US $ 3.5 billion due in 2015, which we believe will pressure the LKR. We expect these two external factors to prompt the CBSL to keep rates on hold in the near term,” StanChart said.
According to the Central Bank, the rupee depreciated 1.4 percent against the dollar by February 20 due to higher import demand.
According to StanChart, this is particularly negative, given the country’s external debt redemptions its high debt-to-GDP ratio of 75 percent as of December 2014.
The bank expects the inflation trajectory to remain benign as the impact of downward price revisions for domestic fuel and essential consumer items is felt from February.
“However, Sri Lanka has a trade deficit and we believe a declining exchange rate will likely have an adverse impact on inflation.”
Sri Lanka’s trade deficit has widened in recent months despite a decline in the oil import bill. The trade deficit widened to US $ 7.5 billion in January-November 2014 from U S $ 7 billion in the same period in 2013.
“We believe that if the trade deficit continues to widen and remittances (the majority of remittances are from the Sri Lankan diaspora in oil-rich GCC states) or FDI slows, it will put depreciation pressure on the LKR,” StanChart said.