April 4, 2019 / 4:20 AM / 6 months ago

Sri Lanka central bank seen standing pat but rate cut not ruled out: Reuters poll

COLOMBO (Reuters) - Sri Lanka’s central bank is expected to leave its key interest rates steady on Monday, a Reuters poll showed, but analysts aren’t ruling out an easing as the rupee steadies and policymakers aim to boost economic growth ahead of elections.

People walk past the main entrance of the Sri Lanka's Central Bank in Colombo, Sri Lanka March 24, 2017. REUTERS/Dinuka Liyanawatte

The economy took a battering in the fourth quarter, with annual growth slowing to a 17-year low in 2018 as a weeks-long political crisis and past policy tightenings sapped business confidence and cooled investment.

The rupee, which fell to a record low in early January, has bounced over 4.8 percent since then, giving policymakers some breathing room to address growth concerns.

Ten out of 13 economists surveyed expected the Central Bank of Sri Lanka to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) steady at 8.00 percent and 9.00 percent, respectively.

One analyst expected the central bank to reduce both rates by 25 basis points at its policy review on Monday, while another predicted a cut of 50 basis points. A third analyst tipped the central bank to cut only the SLFR by 25 basis points.

All analysts predicted the statutory reserve ratio (SRR) to be kept steady at 5.00 percent.

“Though the market expects the rates to be held steady, the central bank could go for a rate cut, given sluggish economic growth ahead of the elections,” said Danushka Samarasinghe, CEO at Softlogic Capital Markets.

The central bank unexpectedly slashed banks’ SRR by 100 basis points in February to spur credit growth after a political crisis triggered credit downgrades by all three major global rating agencies.

That followed a move to raise the SDFR by 75 bps and the SLFR by 50 bps in November, accompanied by a reduction in the statutory reserve ratio (SRR) by 150 bps to 6.00 percent.

Government finances remain shaky, and the island nation has a heavy external debt repayment schedule between 2019 and 2022.

The International Monetary Fund (IMF) reached an agreement with Sri Lanka last month to extend a $1.5 billion loan facility for an extra year, while Prime Minister Ranil Wickremesinghe’s government has boosted state spending in a 2019 budget to support the economy and woo voters before two key elections.

President Maithripala Sirisena’s abrupt change of prime minister in October last year and his decision to dissolve parliament created panic among investors. The move was later ruled unconstitutional and Wickremesinghe was reinstated.

A presidential vote is expected later this year followed by a general election in 2020.

Reporting by Ranga Sirilal and Shihar Aneez; Editing by Shri Navaratnam

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