Sri Lanka Signals Looser Monetary Policy After Holding Rates

Sri Lanka signaled it may ease monetary policy in future if inflation moderates after leaving interest rates unchanged for a sixth month to damp price gains.

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.

There will be “some space to loosen” policy to aid economic growth next year if inflation is under control, Governor Ajith Nivard Cabraal said in an interview with Bloomberg Television today. He cut the forecast for 2012 expansion to 6.8 percent last month after a drought hurt farm output, and following increases in borrowing costs earlier this year to tackle import demand that stoked a trade deficit.

“We feel some policy easing might be necessary to stimulate growth sometime in the first quarter,” said Samantha Amerasinghe, a Colombo-based economist at Standard Chartered Plc. “The likelihood of a rate cut early next year is high, particularly if inflation continues to moderate.”

Sri Lanka has let its rupee drop to pare the trade deficit, fanning import costs and contributing to a consumer inflation rate of more than 9 percent. That’s the highest after India in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

Rupee Slide

The rupee has weakened more than 12 percent against the dollar this year, while the Colombo All-Share Index is down 8.7 percent. The currency slipped 0.2 percent to 129.93 per dollar at 11:09 a.m. in Colombo. The stock index fell 0.1 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.”

The priority is “inflation control,” Cabraal also said in the television interview, adding the monetary authority will “watch carefully” until December to see how the economy evolves.

The governor reduced the estimate for gross domestic product growth this year on Sept. 27, 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 the trade imbalance, which has pressured currency reserves. The International Monetary Fund has loaned Sri Lanka $2.6 billion to help rebuild them.

Next year will be challenging, and “if we can provide some space for the economy to grow a little faster than it has this year, that will be in order,” Cabraal said today.

The island’s budget, due Nov. 8, is unlikely to contain further steps to weaken the rupee, Cabraal said, adding it will probably seek to encourage foreign inflows and bolster the development of infrastructure to stimulate growth.

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