Central bank holds rates unchanged; private sector credit up 21 pct

Sept 25, 2015 (LBO) – Sri Lanka’s central bank held key interest rates unchanged on Monday despite credit to the private sector rising 21 percent due to low interest rates amid a further drop in foreign reserves.

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank were left unchanged at 6.00 per cent and 7.50 per cent, respectively.

“The increased credit flows to the private sector have been sustained mainly due to prevailing low market interest rates amidst low inflation environment,” the central bank admitted.

The decision was mostly expected by market participants with some acknowledging that hiking interest rates, as per the suggestion of the IMF, would be a politically difficult decision to make.

The gross official reserves, which stood at 6.8 billion dollars at end July, decreased to 6.4 billion dollars by end August.

“Official reserves are expected to increase during the remainder of the year with the expected long term external financial flows to the government,” the statement said.

The trade deficit narrowed in July, and a seven percent depreciation of the rupee so far this year would further support the current account, it said.

Core inflation increased to 3.9 per cent in August 2015 on a year-on-year basis, from 3.5 per cent in the previous month.

“Headline inflation is expected to remain comfortably within 2.0-3.0 per cent by year end, supported by improved domestic supply conditions and subdued global commodity prices,” the monetary authority said.