Sri Lanka Central Bank Keeps Interest Rate Unchanged

By Anusha Ondaatjie

Sept. 15 (Bloomberg) -- Sri Lanka's central bank kept its benchmark interest rate unchanged for a 19th straight meeting to spur growth as falling commodity prices helped ease Asia's third-fastest inflation.

The Central Bank of Sri Lanka maintained its repurchase rate at 10.5 percent, the Colombo-based bank said in a statement today. All 10 economists surveyed by Bloomberg News predicted the decision.

Sri Lanka's policy makers have avoided joining counterparts across Asia in raising borrowing costs this year, choosing instead to focus on reducing money supply to tackle inflation. Price gains may slow further after easing a second month in August, the central bank said last month.

The central bank kept rates unchanged to ``stimulate the economy,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. ``The bank needs to watch out on inflation in doing this.''

Economic growth probably slowed for a second consecutive quarter in the three months ended June 30, constrained by the highest interest rates since 2002 and escalating violence in the island's civil war.

The South Asian economy expanded 5.9 percent in the second quarter from a year earlier, after growing 6.2 percent in the previous three months, according to the median forecast of eight analysts in a Bloomberg News survey. The statistics department is due to release the data in Colombo this week or next.

Under Siege

The Liberation Tigers of Tamil Eelam are under siege in their last remaining bases in Wanni in northern Sri Lanka after losing control of the east to the army in July last year, the worst defeat in their 25-year struggle for a separate homeland.

Consumer prices in the capital Colombo rose 24.9 percent last month from a year earlier, after climbing 26.6 percent in July. The central bank said in January it was targeting annual inflation of about 10 percent for 2008.

An increase in the production of food and falling global commodity costs will help ease price pressures further, the central bank said on Aug. 20.

``Pressures on the price levels emanating from international commodity prices have further moderated,'' the central bank said today. ``These favorable developments on both demand and supply sides are likely to shape inflation expectations also so as to contain inflation further.''

Sri Lanka policy makers have kept monetary policy tight by reducing the amount of funds in the banking system, instead of raising interest rates.

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