POLL: Sri Lanka Central Bank expected to keep policy rates steady

July 26, 2016 (Reuters) – Sri Lanka's central bank is expected to keep its key interest rates steady for a fifth straight month on Thursday, a Reuters poll showed, despite signs that inflation and private sector credit growth are picking up. The central bank has tightened monetary policy twice since December to fend off pressure on the fragile rupee currency and curb inflation arising from cheap credit. The International Monetary Fund has welcomed the current policy stance and agreed that further tightening could be needed if credit and inflation continue to accelerate.
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Twelve of 13 economists surveyed expect the central bank to keep its standing deposit facility rate (SDFR) steady at 6.50 percent, and its standing lending facility rate (SLFR) unchanged at 8.00 percent. But analysts also said the possibility of another rate hike cannot be ruled out. Private sector credit growth hit a near four-year high of 28.1 percent in April from a year earlier, while June consumer prices rose to a 32-month high of 6.0 percent after the government raised the value added tax (VAT) to tackle a soaring deficit.. "If you give a tightening signal, it could somewhat limit credit growth. By doing that, the banking sector might think of parking the excess money with the central bank rather than chasing low quality credit," said Danushka Samarasinghe, research head at Softlogic Stockbrokers. "Though policy rates have risen only by 50 basis points (bps), market rates have risen much more. So the market has already adjusted to the expectation of policy tightening." In February, the central bank raised both the SDFR and the SLFR by 50 bps from record lows. That followed a 150 bps hike in commercial banks' statutory reserve ratio (SRR) in December. The average weighted prime lending rate (AWPR) has risen 261 bps since the February moves and 346 bps since the SRR hike. All 13 economists expect the statutory reserve ratio (SRR) to remain at 7.50 percent. New Central Bank Governor Indrajith Coomaraswamy said earlier this month that credit growth is slowing due to monetary tightening measures taken early this year. The IMF has urged Sri Lanka to reduce its fiscal deficit, raise government revenue and improve its foreign exchange reserves, which were at $5.27 billion as of end-June, down by more than a third from October 2014. Moody's last month cut Sri Lanka's rating outlook to negative from stable, citing further weakening on the fiscal front and subdued economic growth, which could lead to renewed balance of payments pressure. The rupee has come under pressure due to lower interest rates, higher imports, and foreign outflows from government securities last year. But it has steadied after the central bank raised $1.5 billion from a sovereign bond sale early this month. Following are poll forecasts for rates on Thursday:
                    SDFR         SLFR        SRR
                  (in pct)    (in pct)     (in pct)    
Median              6.50         8.00       7.50
Average             6.52         8.02       7.50  
Minimum             6.50         8.00       7.50
Maximum             6.75         8.25       7.50   
Rates in June       6.50         8.00       7.50
No. of economists    13           13         13
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