Monday, October 22, 2012

Sri Lanka keeps interest rate unchanged, as expected

    The Central Bank of Sri Lanka kept its benchmark repurchase rate steady at 7.75 percent, as widely expected, as the pace of export growth had slowed moderately while the inflation rate was expected to remain in mid-single digit levels in the medium term.
    The central bank, which has cut rates twice this year for a total of 75 basis points, said tight monetary policy continues to pay off, with private sector credit expansion easing further and the annual inflation rate dropping to 9.1 percent in September, down from 9.5 percent in August and July's 9.8 percent.
     Private sector credit growth fell to an annual rate of 28.7 percent in August, the first time since March 2011 it was below a 30 percent growth rate, the bank said.
    Reflecting the global slowdown, the bank said Sri Lanka's exports had decelerated moderately in the last six months but demand measures from this year had led to lower imports and a better trade balance.
    In August, Sri Lanka's balance of payments surplus hit $306 million and official reserves rose to $7 billion, the equivalent of 4.3 month of imports, the bank said.
    Financial markets had widely expected Sri Lanka's central bank to remain on hold following an interview with Reuters on Monday in which the bank's governor said it seemed appropriate to keep the rate unchanged.
    Although Sri Lanka's inflation rate has eased, the central bank acknowledged that recent revisions to administered prices and uncertain global supply conditions kept short-term pressure on inflation.
    "The tight monetary policy stance is expected to prevent second round effects of supply side factors entrenching into future inflation, and thereby help maintain inflation at mid-single digit levels over the medium term" the central bank said in a statement.
    Last month the central bank lowered its 2012 economic growth estimate to 6.8 percent from a previous estimate of 7.2 percent. In 2011 Sri Lanka's economy expanded by a record 8.3 percent.
    In the second quarter, Sri Lanka's Gross Domestic Product grew by an annual rate of 6.4 percent, down from 7.9 percent in the first quarter.


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