Sri Lanka central bank holds rates as focus shifts back to growth

Inflation has accelerated in recent months due to high food costs, but consumer prices eased in September to stand just within the central bank's 4-6% target range

  
A woman walks past the main entrance of the Sri Lanka's Central Bank in Colombo, Sri Lanka February 7, 2017. Image used for illustrative purpose.

A woman walks past the main entrance of the Sri Lanka's Central Bank in Colombo, Sri Lanka February 7, 2017. Image used for illustrative purpose.

REUTERS/Dinuka Liyanawatte

COLOMBO/MUMBAI  - Sri Lanka's central bank held interest rates steady on Thursday as it sought to support economic recovery after increasing rates in August, but said that if needed, it would take measures to contain inflationary pressures.

The Central Bank of Sri Lanka (CBSL) left the standing deposit facility rate and the standing lending facility rate unchanged at 5.00% and 6.00%, respectively, after raising them by 50 basis points each in August to curb rising prices.  

Inflation has accelerated in recent months due to high food costs, but consumer prices eased in September to stand just within the central bank's 4-6% target range.

The CBSL said a global commodity rally would likely fuel price pressures in the near term and cause headline inflation to deviate from targeted levels, having prompted the government to remove a cap on the retail prices of essential commodities.

However, it said these supply-side developments in the near term did not warrant monetary tightening and measures already taken should help stabilise demand side pressures over the medium term.

"We believe that in order to ensure that there is growth momentum that is presently progressing ... we don't need to dampen that and neither do we want to stimulate it any further," said governor Ajith Nivard Cabraal at a news conference.

"Hence, the monetary board decided to keep rates steady and we believe this is the most appropriate stance for the time being".

FOREX INFLOWS CRUCIAL

The central bank said in its statement that outlook for tourism had improved as more countries ease travel restrictions imposed to contain the COVID-19 pandemic. It also expects a rebound in workers' remittances after a moderation in recent months.

Cabraal said the country was actively engaged in securing bilateral agreements for increasing forex inflows to help the country tide over external debt repayments and continue paying for essential imports to support the recovery.

The economy bounced back strongly in the June quarter with real growth of 12.3% year-on-year and is expected to grow by 5% for the full year.

"The CBSL seemed to be encouraged by the first half GDP growth numbers and expects some positive developments in the external sector. So, it wants to hold rates and see how it plays out," said Shiran Fernando, chief economist at Ceylon Chamber of Commerce.

"Domestic factors such as credit growth and supporting the currency may weigh in more than inflation in determining future tightening action," he added.

Adding to inflationary pressures, the Sri Lankan rupee has depreciated by 8.6% against the U.S. dollar so far this year. The country's CSE all-share index rose 1.3% after the policy decision.

The central bank recently unveiled a six-month roadmap for ensuring financial and macro-economic stability, while the government is expected to announce an investor friendly budget with a simpler tax structure on Nov. 12.  

Analysts, however, believe there could be further tightening in the next policy meeting in November if the government's debt position does not improve soon. A lack of U.S. dollars and higher imports is making it tougher for Sri Lanka to repay its external debt.

"External sector and inflationary pressures are continuing to mount and the rate hike in August helped to address this as a policy move," Anshari Perera, a product head at Frontier Research said.

"However, we think this would likely need to be followed by further remedial action in the absence of other reforms, unless there's significant external funding that comes in very soon," she added.

CBSL said it stands "ready to take appropriate measures, as and when necessary, with the aim of maintaining inflation in the desired range under the flexible inflation targeting framework in the medium term, while supporting and sustaining the economic recovery".

(Additional reporting by Chris Thomas and Chandini Monnappa; Editing by Shri Navaratnam, Ana Nicolaci da Costa, Kim Coghill and Raissa Kasolowsky) ((swati.bhat@thomsonreuters.com; twitter.com/swatibhat22; +91-22-68414381; Reuters Messaging: swati.bhat.thomsonreuters.com@reuters.net))


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