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Sri Lanka keeps rates steady, rupee still vulnerable

Reuters | 11.10.2019

COLOMBO, Oct 11 (Reuters) – Sri Lanka’s central bank left its key rates unchanged on Friday after loosening policy earlier this year, although growth is likely to remain subdued as the economy faces rising global risks.

The decision to hold rates was expected ahead of presidential elections next month and as lower bank rates go into effect following a raft of measures to support the economy.

But some analysts foresee the possibility of further loosening next year.

The central bank kept the standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) steady at 7.00% and 8.00%, respectively. A Reuters poll had expected the Central Bank of Sri Lanka to keep both rates steady.

“The measures that have been put in place during the past 12 months are sufficient to achieve the desired outcomes, given adequate time for their transmission through the financial sector,” the central bank said in a statement.

Interest rates were lowered by 100 basis points in two meetings since May to bolster the economy after deadly Easter Day bomb attacks by Islamist militants.

Pressure on the rupee has been building since early September as foreign investors started to pull out their funds after the central bank’s rate cuts. The rupee is down around 4% against the U.S. dollar since April.

The central bank also reduced the SRR by 250 bps, releasing around 150 billion rupees ($832 million) of liquidity to the financial market and imposed caps on rupee deposit interest rates that enabled banks to reduce the cost of mobilising funds from the general public.

The Monetary Board last month ordered banks to cut interest rates on all rupee denominated loans by at least 200 basis points by Oct. 15, from levels in April.

The central bank said on Friday the economy was likely to remain subdued this year and was expected to recover gradually in the medium term. It had said in August that growth would slow to 3.1% or less in 2019.

Growth eased to a 17-year low of 3.2% in 2018 and a Reuters poll has predicted growth will be its lowest in nearly two decades this year.

Analysts say investors and businesses will likely be cautious until the Nov. 16 presidential elections are over.

“We are very close to the elections, so there is unlikely to be a change in rates,” said Dimantha Mathew, head of research at broker First Capital Holdings.

Capital Economics said in a report it was pencilling in a 50-basis-point cut for the second half of next year. “Global sentiment should start to improve around the middle of next year, and this could allow the central bank to cut interest rates further,” said Alex Holmes, Asia economist.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.