Feb 25, 2016 (LBO) – Sri Lanka’s central bank governor hopes interest rates can be maintained at current levels, after a 50 basis point rate hike last week, but this will be determined by external factors, he said.
The island’s policy rates are at 6.5 percent and 8 percent, while 10-year treasury bond yields have increased to 11.75 percent.
“We will certainly try our best to keep interest rates at this level, and not let them escalate much further, but it is to a large extent determined by international trends,” Governor Arjuna Mahendran said, speaking to media on the state of the economy.
Emerging markets continue to experience foreign selling, according to him. First it was in anticipation of a US rate hike. Now its Middle Eastern sovereign funds liquidating positions to cover low oil revenues.
“If this selling continues for many more months to come, then we will have to consider further rate hikes ahead. So I won’t rule it out.”
The 50 basis point rate hike also took capital flows into account.
“This is a factor we have looked at in order to induce investors to keep their money in Sri Lanka. We have to offer higher returns. Raising interest rates ensures the currency stabilizes,” he added.
Last week’s rate hike was also motivated by growth in bank lending running at 25 percent. Once growth runs beyond 15 percent, he is bound by law to write to the finance minister with an explanation.
“We had to resort to this unfortuate interest rate hike last week. The basic issue is that growth of bank lending is running at about 25 percent.”
“It is a good thing, and a sign of confidence, when banks are willing to lend and people are willing to borrow. But you don’t want it to get out of control. We don’t want a credit bubble that creates more problems than it solves.”
Sri Lanka’s economic growth is running above 5 percent and Mahendran suggested that economic growth would continue to be a priority. Monetary policy, in that sense, would support this.