REUTERS: Sri Lanka’s Central Bank could raise its key policy rates in coming months if it skips a chance to tighten next week, a Reuters poll showed, underlining renewed pressure on the rupee after the Federal Reserve’s rate hike last month.
The Central Bank has already raised its benchmark rates three times since December 2015 to fend off pressure on the fragile rupee and curb stubbornly high credit growth that has pushed up inflation.
The tightening has dragged on the economy, which grew at a slower 4 percent annual pace in the first nine months of 2016 compared to 5.7 percent in the same period the year-before.
The policymakers face a tricky balancing act as the rupee comes under fresh selling pressure, hurt by capital outflows thanks to the Fed’s more hawkish policy outlook and uncertainty caused by US President Donald Trump’s policies on trade, immigration and international relations.
That uncertainty was reflected in the Reuters poll showing economists were split on their views. Seven out of 13 economists surveyed predicted the Central Bank will keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.00 percent and 8.50 percent, respectively.
However, three economists expected a 50-basis-point hike in both policy rates while the rest tipped a 25-basis-point hike. All 13 forecasters expect the statutory reserve ratio (SRR) to stay at 7.50 percent.
“The Central Bank will be weighing up the trend in credit growth towards the end of 2016,” said Shiran Fernando, an analyst at Colombo-based Frontier Research, signalling policymakers could move either way depending on where they see the greatest risks for the economy.
The Sri Lankan rupee fell 3.9 percent in 2016 and has eased around 0.3 percent so far this year, pressured by dollar demand from importers and foreign investors’ exiting from government securities. Private sector credit grew 22 percent in October from a year earlier, slowing from September’s 25.6 percent and easing from a near-four-year high of 28.5 percent hit in July.
Sri Lanka’s consumer prices rose to a six-month high of 5.5 percent in January from a year earlier, accelerating from the previous month’s 4.5 percent under a revised calculation method.
The government revised the base year and the composition of market basket of the Colombo Consumer Price Index (CCPI) with effect from January to reflect the changes in the market.
The Central Bank has raised both the SDFR and the SLFR by 50 bps each in February and July 2016. That followed an increase of 150 bps in commercial banks’ SRR in December.