Central Bank seen on hold but rate hike not ruled out

(Colombo) REUTERS: Sri Lanka’s Central Bank is likely to keep key interest rates unchanged at its policy review on Friday but a rate hike cannot be ruled out as the authorities struggle to ease depreciation pressure on the rupee currency. 

The Central Bank unexpectedly cut its key lending rate by 25 basis points in April to support the economy but the policymakers must also defend a fragile rupee and prevent outflows as emerging markets come under pressure from a rise in the US rates. 

Eleven out of 13 economists in the survey expected the Central Bank to keep its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.25 percent and 8.50 percent, respectively. 

One analyst expected a 25 basis point increase in both the SDFR and SLFR while another analyst predicted a 25 basis point hike only in SDFR. Twelve out of 13 analysts saw the statutory reserve ratio (SRR) remaining steady at 7.50 percent, while one expected an increase of 25 basis points. 

“Dealing with the sharp rupee depreciation is more important than economic growth at this moment as we see a lot of foreign outflows from government bonds,” said Softlogic Stockbrokers Research Head Danushka Samarasinghe. 

“With the Fed rate hikes and strengthening of dollars, hot money is flowing into the US from emerging markets and unless the interest rates are raised, Sri Lanka also will see more outflow.” 

The spot rupee hit an all-time low of 160.17 per dollar on June 20 and is down 3.2 percent so far this year, after falling 2.5 percent last year. Currency dealers expect around a 6 percent fall this year. 
Since April 18, Sri Lanka has seen Rs.28.7 billion of foreign outflows from government securities, the Central Bank data showed. A strengthening dollar since mid-April has increased the credit risk of several emerging markets, including Sri Lanka, due to currency depreciation, ratings agency Moody’s said yesterday. 

The 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 economy. The island-nation’s economy grew 3.3 percent in 2017 and government officials have forecast growth of around 4.5 percent this year.