Sri Lanka Holds Rates at Four-Year High to Balance Inflation

(Bloomberg) -- Sri Lanka kept benchmark rates unchanged at a four-year high as bad weather across the South Asian island pushed up prices beyond the central bank’s target and dented growth.

Governor Indrajit Coomaraswamy held the standing lending facility rate at 8.75 percent and the standing deposit facility rate held at 7.25 percent, the Central Bank of Sri Lanka said in a statement from Colombo on Thursday. The move was predicted by all five economists in a Bloomberg survey. 

“Although near term growth prospects remain subdued, it is anticipated that the economy would recover in 2018 due to continuous surge in exports and investments induced by foreign direct investments,” the central bank said. "Inflation is expected to return to the desired level towards the end of first quarter of 2018."

Provisional estimates of the Department of Census and Statistics indicate the economy recorded a lower than projected growth for the third quarter of 2017, expanding by 3.3 percent year-on-year. That compares with 4.0 percent in the second quarter of 2017.

Coomaraswamy in November cut his forecast for the nation’s 2018 economic expansion to between 5 percent and 5.5 percent, lower than a previous growth forecast of around 6 percent. The central bank expects appropriate monetary conditions to help inflation reach
the desired levels in 2018 after the worst drought in 40 years followed by the most severe flooding in over a decade disrupted supply chains and fueled inflation to the fastest pace since 2015.

The central bank remains cautious on rates because “growth is below potential,” even as it may need to respond “if there clearly is pressure” from the Fed’s normalization program, Coomaraswamy said in an interview last month.

The central bank raised rates in March to quell price gains and bolster the rupee.

©2017 Bloomberg L.P.