August 3, 2018 / 2:31 AM / in 3 months

Sri Lanka central bank keeps key rates steady as expected

COLOMBO (Reuters) - Sri Lanka’s central bank left its key policy rates unchanged as expected on Friday, saying the decision backed its goals for stabilizing inflation and fostering sustainable economic growth.

The move comes as some investors are worried about a slowing economy and increases in fiscal spending ahead of presidential elections later next year and possible provincial council polls early in 2019.

The island nation’s growth slowed to a 16-year low of 3.3 percent in 2017, and the central bank has estimated this year’s growth to be between 4 percent and 4.5 percent, falling short of the 5 percent touted earlier.

“Sri Lanka’s real economic growth is expected to record a gradual acceleration from the second quarter of the year,” the central bank said in a statement on Friday.

“The economy is projected to reach its potential over the medium-term, benefiting from a competitive flexible exchange rate, a low inflation environment and a stronger policy framework to support exports and investment.”

The IMF in March urged the central bank to stand ready to tighten policy if signs of demand-side inflation pressures or accelerating credit growth resurface. Credit growth slipped to 14.9 percent year-on-year inJune, off a near four-year high of 28.5 percent hit inJuly 2016.

The central bank, which earlier said it had shifted away from a tightening bias, expects inflation to remain in the bottom half of a 4-6 percent band through the rest of this year.

Previous rate hikes through December 2015 to March 2017, aimed at curbing high inflation and fending off pressure on the fragile rupee LKR=LK, weighed on the economy.

Tight fiscal measures to meet conditions set by the International Monetary Fund (IMF) for a $1.5 billion loan have also dragged on growth.

The Sri Lankan rupee LKR=LK has been falling steadily since April and is on course to retest recent historic lows.

The central bank said in the statement that recent measures to address the excessive growth of imports of gold and motor vehicles would reduce pressure on country’s balance of payments.

“Given the recent rebound in inflation, it was no surprise (the central bank) decided to leave policy on hold today,” analysts at Capital Economics wrote in a note.

“But with growth continuing to disappoint and inflation likely to drop back again by October, we still expect another rate cut towards the end of this year.”

Reporting by Ranga Sirilal; Additional reporting by Shihar Aneez; Editing by Joseph Radford

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