Sept. 27 (Bloomberg) -- Sri Lanka's central bank will probably keep its benchmark interest rate unchanged at the highest level in Asia to help cool inflation.

Central Bank of Sri Lanka Governor Nivard Cabraal will leave the repurchase rate at 10.5 percent for a seventh straight meeting, according to 11 of 12 analysts surveyed by Bloomberg News. One economist expects a half point increase. The decision is due tomorrow at 4.30 p.m. in Colombo.

Borrowing costs ``may need to be kept at a high level'' until inflation falls to an appreciable rate, Cabraal said earlier this month. He now expects consumer prices to rise by more than 10 percent this year, up from an April estimate of 9 percent, due to higher energy costs.

``Inflation isn't going to ease with rising oil prices,'' said S. Jeyavarman, who helps manage the equivalent of $25 million in stocks and bonds as chief executive officer of National Asset Management Ltd. in Colombo. ``But the central bank doesn't seem to want to put further upward pressure on interest rates.''

Higher borrowing costs and escalating violence between government forces and Tamil separatists have weakened the South Asian island's economy, which Cabraal forecasts will post slower growth this year.

The $26 billion economy will expand 7 percent in 2007, Cabraal said on Sept. 14 in Mumbai, half a percentage point lower than his forecast in July. Citigroup Inc. expects the economy to expand 6 percent this year from 7.4 percent in 2006.

Civil War

Sri Lanka's peace process has been halted by almost daily violence since February last year and the nation is experiencing its worst fighting since Norway brokered a truce in 2002.

Gross domestic product grew a faster-than-expected 6.4 percent in the three months ended June 30 from a year earlier, up from 6.1 percent in the first quarter, as increased overseas shipments and farm output made up for slowing domestic demand.

A separate report tomorrow from the statistics department is expected to show inflation slowed in September to 17.1 percent, according to the median forecast of nine analysts in a Bloomberg survey. The consumer price index, the key inflation gauge watched by the central bank, is due at 3 p.m.

Consumer prices in the capital Colombo rose 17.3 percent in August from a year earlier, after increasing 17.6 percent in July, fanned by increased oil prices and higher import costs because of a depreciating currency.

Crude oil reached a record $83.90 a barrel in New York on Sept. 20. Oil prices increased 7.7 percent this month as hurricanes threatened production in the Gulf of Mexico and U.S. stockpiles declined.

The government says higher borrowing costs have helped to rein in inflation, which soared to a ten-year high of 20.5 percent in January.

The following tables shows estimates for the change in the repurchase rate and the reverse repurchase rate, and the consumer price index:

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                            Repo       Rev Repo
Month                       Sept         Sept
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Capital Alliance           10.50%        12.00%
Ceybank Securities         10.50%        12.00%
Ceylinco Shriram           10.50%        12.00%
Commercial Bank            10.50%        12.00%
First Capital              10.50%        12.00%
John Keells Stockbrokers   10.50%        12.00%
Hatton National            10.50%        12.00%
Lanka Orix                 11.00%        12.50%
National Asset             10.50%        12.00%
Seylan Asset               10.50%        12.00%
Standard Chartered         10.50%        12.00%
Unit Trust                 10.50%        12.00%
-------------------------------------------------

===========================================================
                                        September
                                  From year      12-Month
                                   Earlier   Moving Average
===========================================================
Median                              17.1%       17.5%
Average                             16.9%       17.4%
High                                18.1%       17.8%
Low                                 15.0%       16.8%
Number of Forecasts                   9           9
-----------------------------------------------------------
Firm
===========================================================
Capital Alliance                    17.3%       17.5%
Ceylinco Shriram                    16.6%       17.4%
Commercial Bank                     17.2%       17.5%
Eagle NDB                           17.1%       17.5%
First Capital                       18.1%       17.6%
Lanka Orix Securities               15.0%       16.8%
Seylan Bank Asset Management        17.0%       17.2%
Standard Chartered                  16.7%       17.5%
Unit Trust Management               17.3%       17.8%
===========================================================

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

Last Updated: September 27, 2007 02:11 EDT