CB holds rates at record lows, inflation seen easing

24 July 2015 06:30 pm - 0 - {{hitsCtrl.values.hits}}

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REUTERS - Sri Lanka’s Central Bank kept key policy rates steady at record lows yesterday, ahead of parliamentary elections in August and as inflation is expected to ease in the next few months.

With economic activity picking up on recovering bank lending and investment, the Central Bank was seen unlikely to further cut rates after lowering them by 50 basis points in April.

The Central Bank left the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) unchanged at 6.00 percent and 7.50 percent, respectively. The commercial banks’ statutory reserve ratio was unchanged at 6.00 percent. A Reuters poll had expected no change.

Annual inflation eased to a record low of 0.1 percent in June, from 0.2 percent the previous month.

“We were expecting inflation to be around 3 percent by end of this year. But that would be under shot with a lower crude oil price outlook as Saudi Arabia has said it would increase the output,” Central Bank Governor Arjuna Mahendran told Reuters.

Mahendran said private sector credit growth had recovered completely from a very low level and expected more investments after the Aug. 17 parliamentary polls to boost economic growth in the second half of the year.

Krystal Tan, Asia economist with Capital Economics said she saw little need for further easing as economic activity in the coming quarters would be supported by a recovery in private sector credit growth.

“Moreover, given that Sri Lanka runs persistent current account deficits and is now experiencing a period of political uncertainty, further rate cuts could leave the country vulnerable to a deterioration in global risk appetite,” Tan said in a research note.

Private sector credit in May grew 17.6 percent from a year earlier compared with a 15.2 percent rise in April, the central bank said.

Shiran Fernando, an economist at Colombo-based Frontier Research, said the decision to hold was appropriate as private sector credit growth had responded to the April rate cut.

Sri Lanka’s economy grew an annual 6 percent in the first quarter, according to re-based data introduced this month. The economy grew 4.5 percent last year compared with 3.4 percent in 2013. The Central Bank is yet to release 2015 estimates using the new base year.

Mahendran told Reuters earlier that rates would likely stay on hold until parliamentary polls, but there could be a significant cut later if a stable government was elected. Until April, rates were steady for 14 months.

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CB holds rates at record lows, inflation seen easing

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