Central Bank seen keeping policy rates on hold

Sri Lanka’s Central Bank is expected to keep interest rates steady for a seventh straight month today, a Reuters poll showed, and may join other banks in Asia to loosen monetary conditions only after inflation eases early next year.

All 14 analysts polled by Reuters expect the repurchase and reverse repurchase rates to be left unchanged at 7.75 percent and 9.75 percent respectively. The two benchmarks are at their highest in three years.

One analyst expected the Central Bank of Sri Lanka to cut commerical banks’ statutory reserve ratio by 100 basis points in a modest step to support growth, which is expected to slow down to 6.8 percent this year from a record 8.3 percent in 2011.

While central banks from Australia to Thailand have eased policy to counter a global slowdown, Sri Lanka has maintained a tight monetary stance to keep a lid on inflation as well curb the country’s fiscal and external deficits.

Since February it has raised rates twice and the government said earlier this month that it expects to meet the fiscal deficit target of 6.2 percent of the gross domestic product, the level agreed with the International Monetary Fund under the terms of a $2.6 billion loan.

Central Bank Governor Ajith Nivard Cabraal said inflation remained a key concern and that the bank is watching for signs of moderation before setting policy.

 “We are keeping a sharp eye open for inflationary pressure. Once we see that moderating, we will be inclined to take necessary steps to ease monetary policy,” Cabraal told Reuters.

Annual inflation in October was running at 8.9 percent, having hit a 42-month high of 9.8 percent in July.

Samantha Amerasinghe, an economist at Colombo-based Standard Chartered Bank, said inflation may ease further around February. “They might cut rates in the first quarter of next year,” she said.

The rupee has fallen more than 15.2 percent against the U.S. dollar since November last year, swelling the cost of Sri Lanka’s imports and thus contributing to the inflationary pressure.

(Source : REUTERS)