Bloomberg News

Sri Lanka Raises Rates for the First Time in Five Years

February 14, 2012

(Updates with comment from governor in sixth paragraph.)

Feb. 3 (Bloomberg) -- Sri Lanka unexpectedly raised interest rates to contain credit growth and inflation after the economy expanded the most since at least the 1970s in the wake of ending its civil war.

The Central Bank of Sri Lanka raised the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent, the Colombo-based bank said in a statement on its website today. All seven economists in a Bloomberg News survey predicted rates would be unchanged. It was the first increase since 2007.

Central bank Governor Ajith Nivard Cabraal’s move contrasts with neighbors from Indonesia to Thailand that have eased monetary policy as Europe’s debt crisis hampers global expansion. Sri Lanka’s economy grew 8 percent in 2010 and Cabraal has estimated a similar pace in the following two years as the end of a 26-year civil war in May 2009 helped lure investment from companies including Shangri-La Asia Ltd. and the Sheraton group.

“Raising rates will slow credit demand, which is a concern here,” Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund, said before the decision. “This move won’t hinder Sri Lanka from achieving its growth target.”

The island’s monetary authority is balancing the need to support growth with checking inflation, and has the instruments to cool demand pressure, Cabraal said this week.

Credit Growth

“The trends we have seen in credit growth has been quite substantial,” Cabraal said in an interview with Bloomberg Television today. “There has been momentum which is building up fairly strongly, and that’s good for the growth side, but from the stability point of view we have been a little bit concerned that it was growing a little too fast.”

The benchmark Colombo All-Share Index of stocks fell 1.4 percent at the close yesterday, while the Sri Lankan rupee was little changed at 113.90 per dollar.

Sri Lanka devalued the island’s rupee by 3 percent in November to aid exports. Consumer prices in the capital, Colombo, increased 3.8 percent January from a year earlier after gaining 4.9 percent in December.

“Inflation right now is under control, and we have been encouraged by the trends that we have seen over the past six months,” Cabraal said today. “But going forward, to the latter part of this year and beyond, we do feel that the impact of very big credit growth could have serious repercussions.”

Exceeding Projections

Credit granted by commercial banks to the private sector increased by 34.5 percent from a year earlier in December, which “substantially” exceeded projections, the central bank said.

The authority aims to curtail import-related credit to reduce the trade and current-account deficits, and ensure that inflation remains at the “mid-single digit levels” in the second half of 2012, it said.

The central bank has also decided to direct commercial banks to “moderate” their credit disbursements, and will monitor the targets for foreign direct investment inflows regularly to enable a “healthy surplus” in balance of payments in 2012, it said.

Sri Lanka’s $50 billion economy is likely to expand 8 percent in 2012 compared with an estimated 8.3 percent in 2011, Cabraal said last month. The Asian Development Bank said this week it plans to lend Sri Lanka $300 million in 2012 to fund public works, including roads, power and water supply projects.

--With assistance from Rishaad Salamat and Karolina Miziolek in Hong Kong, Brendan Murray and Michael Heath in Sydney, Manish Modi in New Delhi and Hari Govind in Mumbai. Editors: Rina Chandran, Stephanie Phang

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

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Stephanie Phang at sphang@bloomberg.net


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