Sri Lanka rates unchanged for a third month

Slowdown has hurt Sri Lankan exports and crimped the island’s economic expansion

Colombo: Sri Lanka left interest rates unchanged for a third straight month as one of Asia’s fastest inflation rates limits room to join a monetary stimulus drive stretching from China to Europe.

The Central Bank of Sri Lanka kept its reverse repurchase rate at 9.75 per cent and the repurchase rate at 7.75 per cent, the Colombo-based bank said on its website today. All eight economists in a Bloomberg News survey predicted the decision, which follows increases in February and April.

The European Central Bank, People’s Bank of China and Bank of England eased policy in a span of 45 minutes on July 5 as the euro-area debt crisis weighs on global growth. The slowdown has hurt Sri Lankan exports and crimped the island’s economic expansion, while a slide in the rupee to a record low has fanned import costs and pushed inflation above 9 per cent.

“With the global uncertainties, it is time to join the monetary easing bias and boost growth,” said Sarath Rajapakse, director of research at Capital Trust Securities Pvt in Colombo. “Lower interest rates won’t create credit expansion and fuel inflation” as the increase in import prices will help to limit demand, he said.

The rupee touched its weakest level of 134.30 per dollar on June 28 after Sri Lanka moved to a more freely floating exchange rate in February to curb imports and narrow a trade deficit that’s pressured currency reserves.

Policy overhaul

Under the policy overhaul, the island also raised energy prices to reduce inward shipments of oil and boosted borrowing costs for the first time since 2007 to damp credit growth.

The rupee was little changed at 133.8 per dollar at 10.32am local time. The Colombo All-Share index slipped 0.1 per cent.

Inflation quickened to 9.3 per cent in June, the fastest pace after Pakistan and India in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

The island’s trade deficit is narrowing as import growth is shrinking sharply, the central bank said in today’s statement. The rupee should strengthen in the next few months, Governor Ajith Nivard Cabraal said in an interview with Bloomberg TV.

“We believe the changes that are taking place, particularly the reduction in the import growth, as well as the credit growth, which has been to some extent moderated, those are helping us to maintain the equilibrium in the economy,” Cabraal said.

He projects a 7.2 per cent expansion in 2012, compared with 8.3 per cent last year, and expects 7 per cent average inflation in the $59 billion (Dh216.65 billion) economy.

Sri Lanka’s economy has revived following the end of the island’s 26-year civil war in 2009. President Mahinda Rajapakse has said he aims to boost exports, lure investment and keep separatism in check to foster development.