CB seen holding policy steady to support economy

•  All 13 analysts predict all rates to be steady
•  Tight fiscal, monetary policies weigh on growth
•  Policy announcement due on Sept. 26 

Sri Lanka’s Central Bank is expected to keep its key interest rates steady on Tuesday, a Reuters poll showed, to support a stuttering economy even as inflation accelerates amid strong credit growth.
All 13 economists in the survey predicted the Central Bank would keep its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.25 percent and 8.75 percent, respectively.

They also forecast the statutory reserve ratio (SRR) to stay at 7.50 percent. The International Monetary Fund in June said further monetary policy tightening in Sri Lanka “is desirable” until there are clear signs that inflationary pressures are subsiding, and called for more measures to curb strong credit growth.

Rates in treasury bills have fallen between 86-201 basis points since April, mainly driven by foreign buying in t-bonds, which could be good for the economy but may also add to inflationary pressures.
“At the moment, economic growth is more important than strong credit,” Danushka Samarasinghe, research head at Softlogic Stockbrokers.

“The full year growth will be around 4.2 percent, which is below the expectation. So the Central Bank will be more concerned over the GDP growth than credit expansion and inflation.”

The previous rate increases have dragged on the US$81 billion economy, which grew at an annual pace of 4.0 percent in the quarter ended June 2017, nudging up from 3.8 percent in the previous quarter. Tight fiscal policy has also crimped growth.

Analysts expect 2017 growth will significantly undershoot the Central Bank’s forecast of between 4.5 and 5 percent, although Prime Minister Ranil Wickremesinghe has predicted up to 5 percent growth for the year. The Central Bank tightened monetary policy four times since December 2015 through March this year to fend off pressure on the fragile rupee and curb stubbornly high credit growth that stoked inflation.

Those measures have had some impact, with annual private sector credit growth of 18.6 percent in June slowing from May’s 18.9 percent and well off a near four-year high of 28.5 percent hit in July 2016. The Central Bank has said it wants to curb credit growth to 15 percent.

Consumer inflation was up 6 percent in August from a year earlier, accelerating from the previous month’s 4.8 percent.

But trying to dull pricing pressures with another policy tightening could further undermine an economy hit by extreme weather conditions - the most severe drought in 40 years in the first quarter and the worst flooding in 14 years.

The Sri Lankan rupee fell 3.9 percent in 2016 and has slipped around 2 percent so far this year, pressured by dollar demand from importers and foreign fund outflows from government securities early in the year on the back of rising interest rates in the United States.