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Sri Lanka Holds Rates to Slow Price Gains as Growth Sputters

Sri Lanka left interest rates unchanged to damp price gains and bolster economic growth, while signaling it may ease monetary policy in coming months.

The Central Bank of Sri Lanka kept its reverse repurchase rate at 9.5 percent and the repurchase rate at 7.5 percent, it said in a statement in Colombo today. All seven economists in a Bloomberg News survey predicted no change in the repurchase rate. Six forecast no change in the reverse repurchase rate and one a cut to 9.25 percent.

Governor Ajith Nivard Cabraal said today in an interview with Bloomberg Television that “the time has now come to ease” rather than tighten policy as inflation is “pretty much under control.” The central bank unexpectedly lowered borrowing costs last month for the first time since 2011, after two rate increases last year that were part of efforts to curb import demand and narrow a trade gap that pressured currency reserves.

“The central bank is likely to remain mindful of inflation, but there should be room going forward to move more towards supporting growth,” said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers in Colombo. “The economy is on a more stable footing this year.”

Sri Lanka’s inflation rate of about 9 percent is among the highest in a basket of 17 Asia-Pacific economies tracked by Bloomberg, stoked by a drought that hurt farm output and a drop of about 10 percent in the rupee against the dollar in the past year.

Inflation Outlook

“Inflation is projected to moderate from March 2013 and reach mid-single digit levels thereafter,” the central bank said in today’s statement. The nation expects increased capital inflows this year, it said.

The rupee was little changed at 9:53 a.m. local time. The Colombo All-Share Index rose 0.3 percent.

Cabraal today said that Sri Lanka, which last year received the final tranche of a $2.6 billion loan from the International Monetary Fund, planned to hold talks on a possible new program.

“We would like to see the IMF with us because the IMF gives us a very strong anchor in a time when the world is in such turmoil,” Cabraal said.

The island’s $59 billion economy expanded 4.8 percent in the third quarter, the slowest pace since 2009. The government’s infrastructure drive will help boost expansion to 7.5 percent in 2013 from an estimated 6.5 percent in 2012, Cabraal said Jan. 2.

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