CB seen keeping policy rates steady; rate cut not ruled out

REUTERS: Sri Lanka’s Central Bank is expected to keep key interest rates unchanged today, a Reuters poll showed, but a surprise rate cut is not ruled out to quash uncertainty after coalition partners in the country’s government suffered a loss in local polls.

Eleven of 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.

One analyst predicted a 0.25 basis point cut in both SDFR and SLFR, while another expected a 0.25 increase in the SLFR. All forecast the statutory reserve ratio (SRR) to stay at 7.50 percent.

“A reduction in policy rates could do well in building confidence in the market, specially after the uncertainty created following the local government polls,” said Softlogic Stockbrokers Research Head Danushka Samarasinghe. President Maithripala Sirisena’s centre-left Sri Lanka Freedom Party (SLFP) and Prime Minister Ranil Wickremesinghe’s centre-right United National Party (UNP) suffered defeats in a local election at the weekend, raising concerns over the future of the unity government. The surprise win by a political party backed by former President Mahinda Rajapaksa, who lost the presidential poll in 2015, could also undermine the island nation’s reform agenda, analysts said. Rajapaksa has urged the government to hold fresh parliament elections.

The Central Bank has tightened monetary policy four times since December 2015 through March to fend off pressure on the fragile rupee and curb stubbornly high credit growth that stoked inflation.
The previous rate increases have dragged on the US $ 81 billion economy, which grew at an annual pace of 3.7 percent in the first nine months of 2017, slowing from 4.0 percent growth in the same period of 2016.

The Central Bank revised down last year’s economic growth to 4 percent, from its original forecast of 5 percent after tight monetary and fiscal policies in line with conditions by the International Monetary Fund (IMF) for a US $ 1.5 billion loan.

The IMF in December urged Sri Lanka to maintain a tightening bias in monetary policy until clear signs emerge that inflationary pressures and credit growth are moderating.

Consumer inflation was up 5.8 percent in January from a year earlier, slowing from a record high of 7.8 percent hit in October.