Bloomberg News

Sri Lanka Keeps Interest Rates on Hold to Boost Economic Growth

October 10, 2011

Oct. 11 (Bloomberg) -- Sri Lanka’s central bank left interest rates unchanged for a ninth straight month to support growth as the global economy falters.

The Central Bank of Sri Lanka retained its reverse repurchase rate at 8.5 percent and the repurchase rate at 7 percent, the Colombo-based bank said on its website yesterday. Six of seven economists in a Bloomberg News survey predicted the decision. One expected a reduction of half a percentage point.

Asian nations from China to the Philippines have kept borrowing costs on hold in recent weeks as Europe’s debt crisis and a struggling U.S. recovery cloud the outlook for exports. An easing in Sri Lanka’s inflation to a one-year low increased scope for Governor Ajith Nivard Cabraal to maintain rates at current levels.

“Sri Lanka may cut rates going forward as inflation is less of a worry in the country and the main objective is to promote growth,” said Jay Shankar, Mumbai-based chief economist at Religare Capital Markets Ltd. He didn’t say by when he expects a reduction in borrowing costs.

The Sri Lankan rupee rose 0.1 percent to 110.15 per dollar at the close in Colombo yesterday before the report was released. The Colombo All-Share Index of stocks fell 0.4 percent.

Consumer prices in the capital, Colombo, increased 6.4 percent in September from a year earlier after gaining 7 percent in August, according to the Department of Census and Statistics.

Slowing Inflation

Inflation may “moderate” further this year because of “improvements in domestic supply conditions” and a possible drop in international commodity prices, the central bank said in yesterday’s statement.

Sri Lanka’s inflation rate will likely fall to less than 6 percent by December, central bank Deputy Governor Dharma Dheerasinghe said last week as he forecast the economy to expand 8.3 percent in 2011, less than an earlier estimate of 8.5 percent.

Sri Lanka’s macroeconomic conditions are “quite strong” and the nation’s monetary policy stance is “appropriate” to support growth, the International Monetary Fund, which has disbursed $1.75 billion to Sri Lanka under its $2.6 billion loan program, said Sept. 6.

Pakistan’s Move

In neighboring Pakistan, policy makers on Oct. 8 reduced borrowing costs for a second straight meeting. They have lowered the benchmark rate by 2 percentage points since the end of July. India has boosted rates 12 times since mid-March 2010 to curb an inflation rate that has stayed above 9 percent this year.

Sri Lanka’s Cabraal reduced the central bank’s reverse repurchase rate to 8.5 percent in January from 9.75 percent at the start of July 2010.

Foreign investment and tourism after the end of the conflict against the Liberation Tigers of Tamil Eelam in May 2009 have aided Sri Lanka’s $50 billion economy.

Overseas visitor arrivals rose 35 percent to a record 537,787 in the first eight months of 2011 from a year earlier, according to the Sri Lanka Tourist Board.

China Merchants Holdings (International) Co. on Aug. 12 signed an agreement to build and operate a container terminal in the capital, Colombo, that may cost more than $500 million, its largest investment overseas.

--With assistance from Manish Modi in New Delhi Editors: Cherian Thomas, Mark Williams

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Hari Govind at hgovind@bloomberg.net


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