Sri Lanka Holds Policy Rates to Slow Inflation Rate

By Cherian Thomas

Dec. 19 (Bloomberg) -- Sri Lanka’s central bank kept policy rates unchanged, refraining from lowering borrowing costs as it sought to contain inflation that has stayed at more than 16 percent for over a year.

The Colombo-based bank also kept the statutory reserve ratio, or the amount of deposits lenders need to keep as reserves, unchanged at 7.75 percent, after reducing it twice since early October. The benchmark interest rate was left unchanged at 10.5 percent for a 22nd straight meeting.

Having one of the highest inflation rates in Asia has given Governor Nivard Cabraal limited room to ease monetary policy to support economic expansion, which slowed last quarter as a global economic slump hurt demand for the nation’s tea, rubber and textiles. In contrast, the Philippines and the U.S. cut benchmark interest rates this week to spur growth.

“The central bank is constrained at the moment by high inflation,” said Geeth Balasuriya, an analyst at HNB Stockbrokers Pvt. in Colombo. Still, “the next change in the policy rates will be downwards to support growth.”

Easing inflation may give the central bank more room to maneuver in the coming months. Consumer-price gains in the capital Colombo eased for a fifth month in November to 16.3 percent as oil and food prices fell. Cabraal wants to bring inflation to a “single-digit level” in 2009.

“Further deceleration in inflation would help investors as well as consumers in their effective decision-making process, improving the growth outlook for the economy,” the central bank said in its policy statement today.

Growth in the $32 billion economy slowed to 6.3 percent last quarter from a year earlier, compared with 7 percent in the three months ended June 30, government figures showed this week.

The island’s economy may expand 6 percent this year, at the lower end of the central bank’s 6 percent-to-6.5 percent forecast, according to Suranjana Vidyaratne, head of the country’s statistics office.

Growth may also take a hit after Sri Lanka’s credit rating was cut this week by Standard & Poor’s to B, five levels below investment grade. A lower rating will make it more expensive for the nation to borrow from international financial markets to fund spending on defense, roads and ports.

That may force President Mahinda Rajapaksa to raise funds from the domestic market, preventing interest rates from declining in a nation that already has Asia’s highest borrowing costs after Pakistan.

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.