COLOMBO: Sri Lanka's central bank on Wednesday kept its key policy rates steady, contrary to market expectations for an increase, and cut this year's economic growth target to 7.2 percent from 8 percent.
The growth target cut stemmed from measures taken to curb the trade deficit, which doubled last year to a record $9.7 billion.
Lower imports, higher energy costs and a decline in credit flows will contain growth, the central bank said.
"The main risk for the economy was emanating from the trade deficit, which is mainly because of high import growth," Central Bank Governor Ajith Nivard Cabraal told Reuters. "Now we are addressing the source of imbalance effectively."
Sri Lanka, which is expected to soon announce a growth figure for 2011, has said the economy last year expanded more than 8 percent.
The central bank raised the key policy rates by 50 basis points last month, the first increase since 2007.
In a Reuters poll, 11 out of 17 analysts had expected another 50 bps increase on Wednesday to bolster the rupee and curb demand for dollars for imports.
On Wednesday, the repurchase and reverse repurchase rates were held at 7.50 percent and 9.00 percent respectively.
Earlier, the central bank allowed a market-determined rupee exchange rate to deal with the trade deficit.
The central bank spent more than $2.7 billion to stave off rupee depreciation arising from heavy importer dollar demand in the second half of 2011, which resulted in International Monetary Fund withholding the last tranche of a $2.6 billion loan.
Sri Lanka had a balance-of-payments deficit of $1 billion in 2011.
"STEEP BITE" ON CREDIT
The central bank in its monetary policy statement said the economy's annual private sector credit growth in January was 34.3 percent, hovering around 16-year high.
Cabraal said there will be a "steep bite" on credit growth beginning this month. Last month, the central bank said it would limit annual credit growth at commercial banks to 18 percent.
The government raised fuel prices ranging between 9 percent and 50 percent in February, followed by a 20 percent increase in transport and up to 40 percent hike in electricity prices.
The central bank said recent policy measures are expected to lead to a decline in aggregate demand, and thus it expects inflation to be subdued in 2012.
With the central bank keeping rates on hold, "the pressure will now be on the exchange rate," a currency dealer said. "As long as banks are determined to lend at lower rates to achieve their profitability, you simply can't contain the importer demand."
The rupee opened at 123.30/60 on Wednesday, slightly firmer than Tuesday's close of 123.30/70, dealers said, while stock market is yet to open for the trading.
Danushka Samarasinghe, the head of research at Colombo-based TKS Securities, said the central bank would have opted for unchanged rates as the market rates have already adjusted.
Market interest rates have risen by 115-143 basis points since the policy rates were raised on February 3.
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