Central Bank Cuts Rates

Sri Lanka’s central bank on Wednesday surprised markets by cutting key policy rates to record lows in a move aimed at boosting economic growth, but some analysts warned the easing risked further eroding a shaky balance of payments position.

The monetary authority said it will pursue a relaxed policy stance until stubbornly high borrowing costs come down, noting that business investment remains low despite soft inflation.

It cut the standing deposit facility (SDF) rate and the standing lending facility rate (SLFR) by 50 basis-points (bps) each to 6.00 per cent and 7.50 per cent, respectively. A Reuters poll had predicted the rates to be left unchanged. (Full Story)

“Current behaviour of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year,” Central Bank of Sri Lanka said in a statement.

Annual inflation hit a record low of 0.1 per cent in March as growth has slowed amid slack private consumption, with the $76 billion economy growing 6.4 per cent in the fourth quarter – the weakest in almost two years.

The central bank estimates growth at 7.5 per cent this year, but depressed private credit growth and high borrowing costs have hurt sentiment.

Average Weighted Prime Lending Rate (AWPR), a proxy for market lending rates, was at 7.14 per cent as of April 10, the highest level since September last year.

PRESSURE ON BOP, RUPEE

The policy rates have been kept steady at record lows for 14 straight months through March, and some analysts say Wednesday’s surprise move risks inflaming a worsening balance of payments (BOP) picture and putting more pressure on the rupee currency.

“I don’t think it is an appropriate move given the pressure on the balance-of-payments we have seen in the last six months,” said Amal Sandaratne, CEO at Colombo-based Frontier Research.

Latest official estimates for January 2015 showed the BOP at a deficit of $696.5 million, compared to $732.9 million surplus in the year ago period.

That has pressured the rupee, which is down 1.3 per cent so far this year. Finance Minister Ravi Karunanayake, however, said the country has sufficient funds to defend the rupee and expects more policy easing: “We’ll take more actions to reduce interest rates,” he told Reuters.

The central bank also said the BOP outlook remains favorable in 2015, noting among other factors a lower fuel import bill.

The central bank has been defending the rupee heavily since December amid high local borrowing to finance populist budget policies ahead of Parliamentary polls expected as early as June.

Meanwhile, Sri Lanka has delayed a $1.5 billion sovereign bond issue originally scheduled for April, the finance minister said on Friday, days after parliament rejected his bid to raise government borrowing limits ahead of national elections.

Ravi Karunanayake flagged the issue in February to take advantage of lower borrowing costs to reduce outstanding commercial loans. But he said the country was not desperate for the bond issue.(Reuters)