Central Bank expected to keep policy rates steady

REUTERS: Sri Lanka’s Central Bank is expected to keep its key interest rates steady for a fourth straight month today, a Reuters poll showed, despite signs of rising inflation and stubbornly high private sector credit growth. 

The Central Bank has tightened monetary policy twice since December to fend off selling pressure on the fragile rupee currency, which is hovering around record lows. 
The International Monetary Fund on June 3 welcomed the current policy stance and agreed that further tightening could be needed depending on credit and inflation developments. Ten out of 15 economists surveyed expect the Central Bank to keep its standing deposit facility rate (SDFR) at 6.50 percent, and its standing lending facility rate (SLFR) unchanged at 8.00 percent. 
Four economists expect both rates to be raised by 50 basis points, and one sees both increasing by 25 basis points. 

In February, the Central Bank raised both the SDFR and the SLFR by 50 basis points from record lows. This followed an increase in commercial banks’ statutory reserve ratio by 150 basis points in December. 

“Inflation and credit growth will be the main worries for Central Bank to look for,” said Shiran Fernando, an analyst at Colombo-based Frontier Research. 

All 15 economists expect the statutory reserve ratio (SRR) to remain 7.50 percent. Private sector credit growth accelerated to a near four-year high of 27.7 percent on-year in March, from 26.5 percent in February. 

Sri Lanka’s May consumer prices and core annual inflation rose to multi-month highs after the government increased Value Added Tax (VAT) to crimp a soaring deficit. The IMF has urged Sri Lanka to reduce its fiscal deficit, raise government revenue and improve foreign exchange reserves, which were at $5.6 billion as of end-May, down by more than a third from October 2014 when they touched a record high.