Sri Lanka Keeps Benchmark Rate at Five-Year Low to Support Island’s Economic Recovery

14th December 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka’s central bank kept its benchmark interest rate unchanged at a five-year low to support the island’s economic recovery.

The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent, according to a statement on the Colombo- based bank’s Web site today. The decision was expected by all seven economists in a Bloomberg News survey. The repurchase rate was also maintained at 7.5 percent.

Central Bank Governor Nivard Cabraal aims to keep inflation below 10 percent this year and next to spur spending and bolster the economy after the end of a 26-year civil war in May. Consumer prices in the capital, Colombo, rose 2.8 percent in November from a year earlier, the biggest gain in six months.

“The objective of the central bank is to maintain lower inflation and boost growth rather than create unsustainable inflationary growth,” said Danushka Samarasinghe, research manager at Asia Securities Ltd. in Colombo.

The central bank forecasts Sri Lanka’s gross domestic product will expand as much as 6 percent in 2010 from 3.5 percent this year.

Commercial bank loans rose to 1.18 trillion rupees ($10.3 billion) in September, the first expansion this year, from 1.17 trillion rupees in August.

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid package in July, expects the island’s economic growth and credit demand to pick up from this year, Brian Aitken, the Washington-based lender’s mission chief, said Nov. 20.

‘More Favorable’
“Inflationary pressures continue to remain subdued,” the central bank said in today’s statement. “Prospects for domestic economic activity have improved with the more favorable investment climate that now prevails and the gradual recovery of the world economy.”

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, has more than doubled this year as investors seek to take advantage of the end of the island’s civil war.

Commercial Bank of Ceylon Plc., Sri Lanka’s biggest private lender by assets, said last month it plans to expand in the island’s northern and eastern regions by the end of 2011, anticipating loans will grow as the economy recovers.

President Mahinda Rajapaksainstructed state banks to slash lending rates by about 7 percentage points from Oct. 28 to government employees, farmers, small businesses and industries including fisheries and tourism. Private banks have followed by reducing their rates.

Time Lag
Cabraal on Nov. 18 lowered the central bank’s reverse repurchase rate from 10.5 percent and cut the repurchase rate from 8 percent. Interest rates have dropped amid monetary policy easing “albeit with a time lag,” the bank said Nov. 18.

Cabraal said Oct. 6 consumer prices will probably climb as much as 5 percent this year, and between 5 percent and 6 percent in 2010.

Policy rates are at an appropriate level to support growth and are likely to remain at current levels “in the near future,” Cabraal said in a Nov. 26 interview.

The economy may have expanded about 6 percent in the three months through September from a year earlier, after gaining 2.1 percent in the second quarter, boosted by agriculture and tourism, Cabraal said last month.

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