CB seen keeping rates steady after easing to spur growth

• CB  expects growth of 3% or less after Easter attacks
• Fall in banks’ rates will be slow due to high NPLs - analyst
• Pressure on rupee eases after US$ 2bn sovereign bond inflow

(Colombo) REUTERS: Sri Lanka’s Central Bank is expected to leave its key interest rates unchanged tomorrow, a Reuters poll showed, after cutting them in May to support the economy as tourism and investment plummeted in the wake of Easter Sunday bombings.

Economic growth is expected to slow to 3 percent or less this year, according to the Central Bank, following the attacks, which killed more than 250 people. Militant Islamic State has claimed responsibility.

A Reuters poll has predicted growth would slump to its lowest in nearly two decades this year.

The attack has badly hurt Sri Lanka’s tourism sector, its third-largest and fastest-growing source of foreign currency, while many companies have put investment and expansion plans on hold, analysts say.

Economic growth had already slowed to a 17-year low of 3.2 percent in 2018 as a protracted political crisis and past policy tightening sapped business confidence.

Ten out of 12 economists surveyed expected the Central Bank of Sri Lanka to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) steady at 7.50 percent and 8.50 percent, respectively.

Two analysts expected both rates to be cut by 25 basis points (bps).

All of the analysts predicted the statutory reserve ratio (SRR) would be kept at 5.00 percent.

“You need to allow time to see the impact of previous policy rate cut,” said Dimantha Mathew, Research Head at First Capital Holdings. “Market rates have come down somewhat. But since banks’ non performing loans (NPLs) are also high, banks do not want to rush and reduce their lending rates. So lending is slow and it will take another 3-4 months for market rates to come down.” Some analysts expect the Central Bank will announce steps to boost lending. Pressure on the rupee currency has eased after the country sold US $2 billion of sovereign bonds last month. The rupee fell to a record low in January due to foreign outflows from government securities and political uncertainties. But it has rebounded than 3.7 percent since then through Friday.

The Central Bank’s 50 bps rate cut in May came after it slashed banks’ SRR by 100 bps in February to spur credit growth following a political crisis that triggered downgrades by all three major global rating agencies.

During the 7-week crisis, the Central Bank raised the SDFR by 75 bps and the SLFR by 50 bps in November, accompanied by a reduction in the SRR by 150 bps to 6.00 percent.
Government finances remain shaky, and it has a heavy external debt repayment schedule between 2019 and 2022. The International Monetary Fund said in May it was holding its forecast for Sri Lanka’s 2019 growth at 3.5 percent in spite of the bombings, saying it was too early to assess the financial damage.