Sri Lanka Holds Rates to Curb Inflation as Growth Outlook Dims

Sri Lanka left interest rates unchanged for a sixth month to help damp inflation as tumbling exports hamper economic expansion.

The Central Bank of Sri Lanka kept its reverse repurchase rate at 9.75 percent and the repurchase rate at 7.75 percent, it said in a statement in Colombo today. The decision was predicted by eight economists in a Bloomberg News survey, with one calling for a reduction of 25 basis points in both benchmarks.

Governor Ajith Nivard Cabraal last month cut the forecast for 2012 growth to 6.8 percent after a drought hurt farm output and following increases in borrowing costs earlier this year to tackle import demand that stoked a trade shortfall. Sri Lanka has also let its rupee drop to pare the deficit, fanning an inflation rate of more than 9 percent, one of Asia’s highest.

“While slowing economic growth is a concern, for the time being, the priority for the authorities is stabilizing the economy,” Gareth Leather, a London-based economist at Capital Economics Ltd., said before the release. “Interest rates are likely to remain on hold for the rest of this year and in 2013.”

The rupee has weakened 12.2 percent against the dollar this year, while the Colombo All-Share Index (CSEALL) is down 8.6 percent.

The central bank said in today’s statement that its “tight” monetary-policy stance is expected to “help maintain inflation at mid-single digit levels over the medium term.”

Cabraal on Sept. 27 reduced the estimate for gross domestic product growth this year from 7.2 percent earlier.

Sri Lanka’s overseas sales of items from garments to tea have declined for all except one month this year. Consumer prices in the capital, Colombo, rose 9.1 percent in September from a year earlier, after advancing 9.5 percent in August.

Cabraal raised borrowing costs in February and April to try and reduce a trade deficit that has pressured currency reserves. The International Monetary Fund has loaned Sri Lanka $2.6 billion to help rebuild them.

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

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

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