June 21, 2017 (LBO) – The Central Bank of Sri Lanka is expected to keep key interest rates unchanged in its monthly monetary policy announcement on Friday, with slower first quarter growth and a deceleration in inflation contributing to the decision, First Capital Research said in a pre-policy research note.
GDP growth for the first quarter was slower than expected, growing 3.8 percent year-on-year, with the agriculture sector decreasing 3.2 percent year-on-year due to drought.
“We believe inflation will be under control over the next 2-3 months while there could be some upward pressure towards September and beyond with the floods in May 2017 affecting the supply in the current growing season. As a result there could be possible supply side shortages towards September and beyond.”
CCPI based headline inflation, decelerated on a YOY basis to 6.0% in May 2017 from 6.9% in April 2017, and CCPI based core inflation also decelerated to 5.2% in May 2017 from 6.8% in April 2017.
Sri Lanka’s forex reserves rose to USD 6.8Bn in May 2017 from USD 5.0Bn in April, helped by a 1.5 billion dollar sovereign bond sale, 450 million dollar syndicated loan and dollar purchases by the central bank.
“Foreign Reserves are now at comfortable levels,” the note said.
Commenting on private sector credit growth, FC Research expects that the growth in private credit to descend towards around 18% to 20% from the current level of over 20%.
“In spite of a high private sector credit figure in March 2017 we believe the usual credit slowness in the month of April will keep overall credit under check.”
During the last one-and half months the central bank also bought down its holding in Government Securities from LKR 300Bn to below LKR200Bn as at 19th June 2017.
First Capital Research said there was a 85 percent probability rates would remain unchanged, and a 15 percent probability of a 25 basis point rate hike.
The Press Release on Monetary Policy Review is expected on Friday, 23 June at 7.30 am.