Bloomberg News

Sri Lanka May Hold Rates as Cabraal Says Policy Is Appropriate

October 27, 2011

Oct. 28 (Bloomberg) -- Sri Lanka’s monetary policy is “appropriate,” central bank Governor Ajith Nivard Cabraal said, signaling he isn’t yet ready to cut interest rates to bolster the island’s economy even as inflation slows.

Sri Lanka needs to ensure that inflation remains “under control,” Cabraal said in a Bloomberg Television interview to be broadcast today. The impact on the nation’s exports and growth from Europe’s debt crisis and a struggling U.S. recovery “has been low,” he said.

The Central Bank of Sri Lanka on Oct. 10 left interest rates unchanged for a ninth straight month, joining Asian nations from Malaysia to the Philippines in holding borrowing costs as the faltering global economy threatens the region’s exports. The island’s growth has rebounded after the end of a 26-year civil war in May 2009 boosted infrastructure development, foreign investment and tourism.

“We have built up the space to make the necessary adjustments if necessary,” Cabraal said in the Oct. 26 interview while attending a Commonwealth Business Forum in Perth, Western Australia. “I hope we don’t need to use it.”

The bank has kept its reverse repurchase rate at 8.5 percent and the repurchase rate at 7 percent since January. The next monetary policy announcement is scheduled for Nov. 8.

Consumer prices in the capital, Colombo, increased 6.4 percent in September from a year earlier after gaining 7 percent in August. The island nation’s $50 billion economy is forecast by the central bank to expand 8.3 percent this year, up from 8 percent in 2010. Exports account for about a fifth of gross domestic product.

Europe Exports

Cabraal said overseas shipments to Europe, Sri Lanka’s biggest market, have been buoyant as consumers continue to purchase garments produced in the South Asian island.

The Sri Lankan rupee, which has risen 0.7 percent against the dollar this year, will also hold its value amid anticipated foreign inflows, he said.

“The global crisis is something that is worrying, but I am confident that this would change,” Cabraal said. “What is needed is support in times of difficulty. If the key countries act, stability should return fast.”

European leaders this week persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros ($1.4 trillion), responding to global pressure to step up the fight against the financial crisis.

The International Monetary Fund also said it is ready to disburse its 2.2 billion-euro share of the next installment of Greece’s original bailout.

“At the moment with think that our interest rates are appropriate considering the challenges we face together with the rest of the countries in our region,” Cabraal said. “We need to be a step ahead all of the time and it is very unlikely that we will do anything different in the near future.”

--Editors: Stephanie Phang, Linus Chua

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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