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Sri Lanka keeps rates steady to support a sluggish economy

DIMANTHA MATHEW, HEAD OF RESEARCH AT FIRST CAPITAL HOLDINGS PLC, SPEAKS TO REUTERS

DECEMBER 28, 2017

COLOMBO, Dec 28 (Reuters) – Sri Lanka’s central bank kept its benchmark interest rates unchanged on Thursday, saying inflation and private sector credit growth have cooled to a manageable level as policy makers focus on supporting a slowing economy.

The monetary authority said high food prices caused by supply disruptions could keep headline inflation somewhat elevated in the immediate future, but prices are expected to return to the desired level towards the end of first quarter of 2018.

“Although near term growth prospects remain subdued, it is anticipated that the economy would recover in 2018 due to continuous surge in exports and investments induced by foreign direct investments,” the central bank said in a statement.

As widely expected, the central bank kept the standing deposit facility rate (SDFR) at 7.25 percent and standing lending facility rate (SLFR) at 8.75 percent. The previous rate increases have dragged on the $81 billion economy, which grew at an annual pace of 3.7 percent in the first nine months of 2017, lagging the 4.0 percent growth in the year-ago period.

In a post-policy press briefing, central bank chief Indrajit Coomarswamy said growth is expected to come in below 4 percent for this year, shaving off further from its downgrade last month of output to expand between 4 percent and 4.5 percent.

The original 2017 growth forecast was 5.0 percent. The country was hit by the most severe drought in 40 years in the first quarter and the worst flooding in 14 years in May.

The central bank said the yields on government securities have eased from their peak, correcting some disparity that existed between the policy rates and the yields on sovereign securities.

The International Monetary Fund (IMF) earlier this month urged Sri Lanka to maintain a tightening bias on monetary policy until clear signs emerge that inflationary pressures and credit growth are moderating. Coomaraswamy last month told Reuters that the monetary authority does not see a need for a rate rise because core inflation is running low. L3N1NY51C]

The central bank has said it wants to curb credit growth to 15 percent by year-end. Annual private sector credit growth slowed to 15.4 percent in November, well off a near four-year high of 28.5 percent hit in July 2016.

Consumer inflation was up 7.6 percent in November from a year earlier, slowing from a record high of 7.8 percent hit in the previous month. Core inflation, which excludes volatile commodities, slowed to 5.2 percent last month from 5.8 percent in October.

“At the moment things are in line. The concern is that the GDP has slowed down and the credit growth is also slowing down. If the slow down continues, there is a possibility of cutting rates,”said Dimantha Mathew, head of research at First Capital Holdings.

But he said the central bank would be watchful until the long-delayed local government election scheduled for Feb. 10.

The central bank has tightened monetary policy four times since December 2015 through March this year to fend off pressure on the fragile rupee and curb stubbornly high credit growth that stoked inflation.

 

The comments on this report are provided by the Capital Markets Research Unit of First Capital Holdings PLC an investment bank in Sri Lanka.

The company operates in the capital markets of Sri Lanka in government securities – treasury bills and bonds, stock brokering and share market investments, asset management, private wealth management, retirement planning, personal financial planning, unit trust, margin trading, capital market research, trustee services, corporate finance advisory services including corporate debt structuring (debentures, trust certificates, commercial papers), valuations, restructuring, mergers and acquisitions, initial public offerings (IPOs) and project advisory.

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital is an investment bank providing a full range of financial advisory and services. The Company’s research deliver heightened perspective in fundamental research aiding Share Market Investment in Sri Lanka. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis. With fundamental research coverage of 62 listed securities (reflecting approximately 65% market capitalization) across 15 sectors in Share Market Investment in Sri Lanka.