CB seen keeping policy rates steady amid political crisis

• Rates to be steady despite heavy pressure on rupee from political crisis 
• Analysts believe political uncertainty is too intense to go for rate hike
• Rupee hit fresh low of 175.90 per US dollar on Monday

The Central Bank is expected to leave its key interest rates steady today, despite heavy pressure on the rupee from a deepening political crisis, a Reuters 
poll showed.

President Maithripala Sirisena fired Prime Minister Ranil Wickremesinghe last month and appointed a pro-China former president, Mahinda Rajapaksa, in his place.
The Sri Lankan rupee hit a fresh low of 175.90 per dollar on Monday while the island-nation’s dollar bonds have also plummeted as foreign investors sell their holdings. The rupee has fallen more than 11 percent in the last six months.

While most analysts said they would normally expect a rate hike under such circumstances, they believe the political uncertainty is too intense to risk a blow to economic growth.Moreover, a tightening may provide only a brief respite for the rupee as the crisis looks set to drag on.Eight out of 12 economists surveyed expected the Central Bank to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) to be left at 7.25 percent and 8.5 percent respectively. It cut SDFR by 25 bps in April.

Two economists expected a 25 basis point (bps) increase in both SDFR and SLFR, while one expected a 50 bps hike in both. One analyst expected a 50 bps increase in SLFR.

All 12 analysts saw the statutory reserve ratio (SRR) remaining steady at 7.50 percent.

Sri Lanka’s new administration will likely be forced to boost credit growth ahead of polls to support the economy, analysts say.

Since the new government came in, it has reduced some taxes and fuel prices, a move analysts see as an attempt to woo voters.

The economy, whose growth rate slowed to a 16-year low of 3.3 percent in 2017, picked up to 3.7 percent in the second quarter from 3.0 percent a year ago, led by the services and agriculture sectors as industrial expansion slowed.

Previous rate increases, along with tight fiscal measures to meet conditions imposed by the International Monetary Fund for a US$1.5 billion loan, have dragged on the country’s economy.

“The rupee is more likely to be defended and an increase in the policy rates will give some space to defend the currency,” said Trisha Peries, product head at Colombo-based Frontier Research.

“Otherwise I do not see current economic reasons for the Central Bank to raise the rates.”Sri Lanka has seen net outflows of Rs.110.8 billion (US$574 million) from government bonds so far this year, Central Bank data showed.