Sri Lanka's central bank kept its benchmark interest rate unchanged at the highest level since 2002 to help bolster growth amid the fastest inflation in at least four years.
The Central Bank of Sri Lanka maintained its repurchase rate at 10.5 percent for a 15th straight meeting, the Colombo- based bank said in a statement today. Sixteen out of 17 analysts surveyed by Bloomberg News predicted the decision. One analyst expected a 25 basis point increase.
Governor Nivard Cabraal joins central bank chiefs in Asia in balancing the threat of slowing growth against accelerating inflation. Consumer prices in the capital Colombo rose 25 percent in April from a year earlier, after gaining 23.8 percent in March, on higher food and energy costs.
“Once again it comes down to the fact of growth versus inflation targeting, with authorities preferring growth,'' said Romesh Gomez, a trader at First Capital Treasuries Ltd. in Colombo.
The central bank on April 30 said it was revising down its quarterly targets for reserve money for this year, which would help in “containing the demand driven component of inflation, ultimately containing further inflationary pressures.''
Central Bank of Sri Lanka has kept monetary policy tight with its daily open-market operations to adjust the amount of cash in the banking system and by controlling credit demand.
The yield on the 15.5 percent bond due in January 2010 rose 5 basis points to 17.95 percent at 10:30 a.m. in Colombo, according to First Capital Treasuries Ltd. The rupee was little changed at 107.7 to the dollar, according to First Capital.
Sri Lanka's inflation may slow to 14 percent by the end of this year, central bank Deputy Governor W.A. Wijewardena said on May 15. The increase in prices will ease to “around 8 percent'' by the end of 2009, he said.
Annual inflation, or the 12-month moving average increase in prices, jumped to 18.7 percent in April. The central bank said in January it was targeting annual inflation of about 10 percent for 2008.
Reducing consumer-price gains to a single digit would be challenging due to rising global commodity prices, the central bank said in its annual report paydayloans.
“There is a strong likelihood of the actual 2008 inflation being significantly higher than the previous estimates which were computed on the basis of the crude oil prices during the year 2008 being at an annual average of around $90,'' it said in today's statement.
Crude oil futures reached $135.09 on May 22, the highest since trading began in 1983, and have gained 25 percent in the past two months.
Ceylon Petroleum Corp., Sri Lanka's state oil company, yesterday raised fuel prices for the second time this year to cut losses caused by record crude costs.
Costlier military purchases to combat the separatist Tamil Tiger rebels have also fanned price gains.
The government on Jan. 16 formally ended its 2002 cease- fire with the Liberation Tigers of Tamil Eelam saying the rebels had used the accord to re-arm and prepare for further attacks.
Gross domestic product may expand 7 percent in 2008, at the lower end of the range estimated in November, and up from 6.8 percent last year, according to the central bank.
Growth may slow to 5.8 percent this year amid central bank measures to cool inflation, James McCormack, head of Asia- Pacific sovereign ratings at Fitch Ratings, said April 10.
Sri Lanka may need to consider increasing the proportion of deposits that commercial lenders must place with it or let the currency appreciate to cool runaway inflation, McCormack said.
The Sri Lankan central bank's cash reserve ratio has stood at 10 percent since October 2001.
“There will be runaway inflation if the central bank is not willing to increase interest rates,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. “The government is trying to show good growth numbers.''