May 9, 2017 / 3:12 AM / 3 months ago

UPDATE 1-Sri Lanka cenbank keeps rates unchanged, as expected

4 Min Read

* Economic growth slows after past tightening measures

* Inflation, credit growth expected to slow towards end 2017-cbank

* C.bank raised 25 bps in March to contain inflation expectations

* Rupee stabilising on inflows, borrowings - analysts (Adds details, quotes)

By Shihar Aneez

COLOMBO, May 9 (Reuters) - Sri Lanka's central bank kept its benchmark interest rates unchanged on Tuesday, as expected, and said current monetary policy is appropriate with inflation projected to decelerate gradually this year after March's rate hikes.

The central bank kept the standing deposit facility rate (SDFR) at a four-year peak of 7.25 percent and standing lending facility rate (SLFR) at 8.75 percent, its highest since July 2013.

It said inflation is expected to slow gradually to "desired mid-single digit levels" by 2017, although there could be some monthly fluctuations due to short-term supply-side disruptions and base effects of 2016 tax revisions.

The central bank raised both key rates in its last monetary policy meeting in March to contain inflation expectations. The past tightening has weighed on economic growth, which slowed to 4.4 percent in 2016 from 4.8 percent in the previous year.

"As market interest rates remain substantially high, it is expected that credit...will decelerate to the envisaged levels by end 2017," the central bank said.

Sri Lanka's private sector credit growth remains stubbornly high, which has exacerbated inflation. Credit grew 20.4 percent year-on-year in March, compared with 21 percent in February.

The bank, however, warned it would closely monitor macroeconomic developments in the period ahead "in order to adopt further measures, if required."

A Reuters poll last week showed economists mostly expected the central bank to keep both rates unchanged.

Krystal Tan, Asia economist with Capital Economics, said Sri Lanka may face a risk of rupee depreciation if the U.S. Federal Reserves tightens monetary policy more aggressively than the market expects over the coming months.

"Sri Lanka is especially vulnerable to a weak currency because of its high level of foreign currency debt, which is equivalent to more than 50 percent of GDP," Tan said in a market note.

"A low level of foreign exchange reserves means the central bank would have little choice but to raise rates further if the currency came under further downward pressure."

The central bank has already tightened monetary policy four times since December 2015 to fend off pressure on the fragile rupee and curb stubbornly high credit growth that has pushed up inflation as Sri Lanka faces twin crisis of balance of payments and debt.

The IMF on March 7 urged the central bank to tighten monetary policy if credit growth or inflation did not abate. Sri Lanka's consumer prices rose 6.9 percent in April from a year earlier, slowing from the previous month's record high of 7.3 percent.

The rupee has eased around 1.5 percent so far this year after falling 3.9 percent in 2016, pressured by dollar demand from importers and foreign investors' withdrawing from government securities in the first three months. (Additional reporting by Ranga Sirilal; Editing by Sam Holmes)

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