Sri Lanka Keeps Key Interest Rate Unchanged at 10.5%

By Anusha Ondaatjie

Aug. 20 (Bloomberg) -- Sri Lanka's central bank kept its benchmark interest rate unchanged for an 18th straight meeting after inflation eased for the first time in seven months.

The Central Bank of Sri Lanka held its repurchase rate at 10.5 percent, the Colombo-based bank said in a statement today. All 11 analysts surveyed by Bloomberg predicted the decision.

Policy makers across Asia have been combating price pressures by raising interest rates. Sri Lanka's central bank has been relying instead on reducing money in circulation to tackle inflation, and last month lowered its 2008 target for reserve-money growth to 11.75 percent from 12.5 percent.

``Given its recent performance we believe the central bank will be able to achieve the new aggressive targets, implying slightly weaker growth and over time a reduction in price pressures,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore.

Consumer prices in the capital Colombo rose 26.6 percent last month from a year earlier, after increasing 28.2 percent in June. Asia's second-highest inflation rate may decline as tight monetary policy damps consumer spending, central bank Governor Nivard Cabraal said Aug. 8.

Inflation will continue to moderate amid a ``deceleration in aggregate demand coupled with healthy developments on the supply side,'' the central bank said today. ``With the easing of commodity prices in international markets, external price pressures on domestic inflation are likely to further abate in the months ahead.''

Oil Declines

Crude oil futures touched a 15-week low of $111.34 a barrel on Aug. 15. Wheat dropped 14.5 cents, or 1.6 percent, to $8.7025 a bushel in Chicago on speculation rain in parts of the southern U.S. Great Plains will increase soil moisture for the crop that will be planted starting next month.

Growth in Sri Lanka's $27 billion economy slowed to 6.2 percent in the first quarter from a year earlier, from 7.6 percent in the previous three months. Escalating violence in the island's 25-year civil war, including bomb attacks in Colombo, reduced spending.

The central bank expects economic growth of 7 percent this year, up from 6.8 percent in 2007. Sri Lanka's annual inflation may slow to 14 percent by the end of this year, Deputy Governor W.A. Wijewardena said on May 15.

The authority has also kept monetary policy tight by controlling credit demand.

Credit growth in Sri Lanka's private sector, including consumers, slowed to 12.7 percent by the end of June from as much as 26 percent last year, according to the central bank.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.