Sri Lanka kept interest rates unchanged for a second month, opting to shield growth from tumbling exports even as a slump in the rupee fans inflation.
The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent and the repurchase rate at 7.75 percent, according to a statement on its website today. Seven of eight economists in a Bloomberg News survey predicted no change in the reverse repurchase rate, with one expecting a 0.25 percentage- point cut. Six of eight economists forecast an unchanged repurchase rate, with one respondent expecting a quarter-point increase and another a 25 basis-points cut.
Sri Lanka raised borrowing costs in February and April and has let its currency weaken to a record low as part of a policy overhaul that seeks to damp imports, narrow a trade deficit and protect foreign reserves. The rupee’s drop has contributed to inflation running at a nine-month high, while a 9.2 percent fall in exports in April exacerbated the island’s trade imbalance as Europe’s debt crisis curbs Asian shipments.
“Concerns over growth seem to be overriding inflation worries at present,” Samantha Amerasinghe, a Colombo-based economist at Standard Chartered Plc, said before the decision. “Falling oil prices may ease price pressures going forward.”
Sri Lanka joins Asian neighbors from Pakistan to Indonesia in leaving interest rates unchanged. Asian officials are striving to support their economies as the possibility of a Greek exit from the euro area darkens the global outlook.
Consumer prices in the capital, Colombo, rose 7 percent in May from a year earlier after gaining 6.1 percent in April. Inflation has been fanned by exchange-rate depreciation, the central bank said, adding economic growth will moderate from the second quarter.
The rupee touched 133.5 per dollar yesterday, its lowest level, after the central bank in February moved to a more freely floating exchange rate and as Europe’s debt crisis saps demand for emerging-market assets. The currency has dropped about 17 percent in the past year. The Colombo All-Share Index (CSEALL) of stocks is down 33 percent in the same period.
“We think that the policy measures that we have taken so far have been working in the way that we have expected it to work,” Governor Ajith Nivard Cabraal said in an interview on Bloomberg Television today. “In that sense there doesn’t seem to be any reason to change any of the policy measures that we have put in motion.”
The drop in the rupee will help to narrow the island’s trade shortfall and its currency reserves will keep building this year, the central bank said in today’s statement. Private- sector credit growth was significantly lower in April, it said.
Aside from increasing borrowing costs and allowing the rupee to weaken, officials also raised fuel and energy prices in February to curb inward shipments of oil.
The policy overhaul is starting to work and officials shouldn’t “rush” into further steps, Treasury Secretary P.B. Jayasundera said two days ago.
Imports fell 3.3 percent in April from a year earlier, the first decline in more than two years. The trade deficit was $761 million, widening 2.6 percent from the same period in 2011. Foreign reserves stood at $5.84 billion.
“If we do find that the import demand is rising once again for whatever reason, then we will need to take further measures, but right now the view of the monetary board was that it should probably come down and not go up,” Cabraal said today.
He has previously said average inflation may accelerate to 7 percent in 2012. The central bank governor today reiterated a forecast of 7.2 percent economic growth this year, compared with 8.3 percent in 2011. Sri Lanka’s expansion has picked up after its civil war ended in 2009.
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