Sri Lanka Holds Rates to Contain Price Gains, Aid Growth

Sri Lanka left interest rates unchanged for a second month as it seeks to damp price pressures while supporting economic growth.

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. Seven of nine economists in a Bloomberg News survey predicted no change. Two forecast a quarter-point cut in both rates.

The island’s inflation accelerated to 9.8 percent in January, one of the highest levels in 17 Asia-Pacific economies tracked by Bloomberg. The central bank expects price gains to ease and Governor Ajith Nivard Cabraal said Feb. 5 its “overall view is that this is a time to relax policy” carefully.

“The central bank is moving towards a more dovish monetary policy stance to support growth as inflation is expected to moderate from the second quarter onwards,” Samantha Amerasinghe, an economist at Standard Chartered Plc in Colombo, said before the decision. “However, it’s concerned that further policy easing could risk fuelling near-term inflationary pressures.”

The pace of price increases is expected to moderate after February, the central bank said in today’s statement.

The government’s infrastructure drive since the end of a civil war in 2009 will help boost economic growth to 7.5 percent this year from an estimated 6.5 percent in 2012, Cabraal said last month.

The nation on Dec. 12 lowered borrowing costs for the first time since 2011. That followed two increases in 2012, which were part of policy changes to damp demand for imports and pare a trade deficit that sapped currency reserves.

The rupee has risen about 1 percent this year after falling about 10 percent against the dollar in 2012. Officials let the currency weaken last year to help narrow the trade shortfall. It was trading 0.2 percent higher at 126.20 at 3:10 p.m. in Colombo. The Colombo All-Share Index closed down 0.3 percent.

Separately, the central bank said today that Sri Lanka has decided against seeking a new International Monetary Fund loan program after a recovery in foreign reserves.

(Updates with statement on IMF loan in last paragraph.)
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