Sri Lanka Central Bank most likely to keep rates steady: POLL

Dec 28, 2016 (Reuters) – Sri Lanka’s central bank is most likely to keep its key interest rates steady on Friday, even as some economists expect further tightening to ease pressure on the rupee following the Fed rate hike earlier in the month, a Reuters polls showed.

The central bank has already tightened its monetary policy stance three times since December 2016 to fend off pressure on a fragile rupee and curb stubbornly high credit growth that has pushed up inflation.

The tightening has already weighed on the economy, which recorded a 4 percent year-on-year growth in the first nine months compared to 5.7 percent in the same period last year, official data showed.

Ten out of 13 economists surveyed in the poll expect the central bank to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) unchanged at 7.00 percent and 8.50 percent, respectively.

Three economists expected 50-basis-point hike in both policy rates. All 13 economists expect the statutory reserve ratio (SRR) to stay at 7.50 percent.

“The monetary board will be weighing up domestic and external concerns. Domestically inflation and credit growth are now under control,” said Shiran Fernando, an analyst at Colombo-based Frontier Research.

“It is difficult to rule out if the central bank will raise the rates again because of the external pressure on the rupee.”

The rupee has come under pressure because of lower interest rates, higher imports, and foreign outflows from government securities last year.

The currency has fallen around 3.7 percent since Aug. 25 through Wednesday due to dollar demand from importers and foreign investors who have been exiting from the government securities.

Foreign investors have net sold 55.2 billion rupees ($369.23 million) of government securities in the nine weeks ended Dec. 21.

Fears of U.S. President-elect Donald Trump’s economic policies leading to a rise in the greenback and interest rates have also weighed on the currency.

The International Monetary Fund (IMF) last month said that Sri Lanka’s macroeconomic and financial conditions have begun to stabilise and the island nation’s performance under its $1.5 billion loan programme is satisfactory.

Private sector credit grew 25.6 percent in September from a year earlier, still robust but slowing from August’s 27.3 percent and a near-four year high of 28.5 percent in July.

Inflation rose 3.4 percent on-year in November, slowing from 4.2 percent in the previous month.

The central bank has raised both the SDFR and the SLFR by 50 bps each in February and July. That followed an increase of 150 bps in commercial banks’ SRR in December.

Following are poll forecasts for rates on Friday:

                    SDFR         SLFR        SRR
                  (in pct)    (in pct)     (in pct)    
Median              7.00         8.50       7.50
Average             7.12         8.62       7.50  
Minimum             7.00         8.50       7.50
Maximum             7.50         9.00       7.50   
Rates in November   7.00         8.50       7.50
No. of economists     13           13         13