Sri Lanka’s rupee will stabilize further and economic expansion may accelerate to 8 percent next year from 7.2 percent in 2012, the island’s central bank said.
Inflation will remain in “single-digit” levels this year even as “high and volatile” food and energy costs add to uncertainty about price movements, the Central Bank of Sri Lanka said in its annual report released in Colombo today.
The nation raised interest rates last week for the second time in 2012 to damp credit growth and inflation, extending the biggest overhaul of economic policy since its civil war ended in 2009. Officials let the rupee weaken to a record low and raised fuel prices under the measures, seeking to pare demand for imports such as oil, restrain the trade deficit and shield foreign-exchange reserves.
The reserves have climbed since mid-March and Sri Lanka will aim to rebuild them, Governor Ajith Nivard Cabraal said in Colombo today at the release of the report. The rupee will probably stabilize further and the balance-of-payments will have a surplus of $1.2 billion in 2012, he also said.
The currency, which has weakened about 8.2 percent in 2012, was little changed at 125.65 per dollar at 1:35 p.m. local time. It appreciated about 2 percent last week, aided by the International Monetary Fund’s decision on April 2 to disburse a $426.8 million loan tranche to the $50 billion economy.
The central bank raised borrowing costs on Feb. 3 for the first time since 2007. Officials scrapped a trading band for the rupee on Feb. 9 and boosted energy costs from Feb. 12. The IMF said February’s steps will put the economy on a “more sustainable trajectory.”
Inflation accelerated to a six-month high of 5.5 percent in March on energy costs. The trade deficit was $966 million in January 2012, compared with $645 million a year earlier.
Improvements in supply conditions will help to restrain price increases, the central bank said today. On April 5, it raised the reverse repurchase rate to 9.75 percent from 9 percent and the repurchase rate to 7.75 percent from 7.5 percent.
The monetary authority may raise rates by 50 basis points to 75 basis points in the coming three-to-six months because of concern about credit growth, Barclays Capital said in an e- mailed note today.
Sri Lanka’s monetary tightening contrasts with rate cuts in nations from Brazil to the Philippines in recent months, as officials in emerging markets move to shield growth from the impact of Europe’s debt crisis on exports.
The central bank estimated 8.3 percent gross domestic product growth in 2014.
The economy is posting strong expansion after the end of the 26-year civil conflict, President Mahinda Rajapaksa said in Colombo today.
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