Sri Lanka keeps rates unchaned to spur growth

Sri Lanka's central bank kept interest rates unchanged as expected to encourage bank lending and spur faltering economic growth amid signs of accelerating inflation. The central bank kept its repurchase rate at a five-year low of 7.50 percent after cutting it 3 percentage points so far this year. The reverse repurchase rate stands at 9.75 percent, its lowest in more than four years after the bank cut it by 2.25 percentage points this year.
"Still there is room for lending rates to come down and more credit growth," Nandalal Weerasinghe, an assistant governor at the central bank, told Reuters. "Inflation has bottomed out and we expect it to be around 5-6 percent throughout 2010." The weighted average prime lending rate is at 11.29 percent, but average bank lending rates are still around 15 percent.
Annual inflation accelerated to a six-month high of 2.8 percent last month from 1.4 percent in October, due to a base effect and rising food prices. It hit a record low of 0.7 percent in September. "The central bank has cut rates to a maximum when the inflation was low," said Danushka Samarasinghe, head of research at Asia Securities. "Now it is waiting for growth to pick up."
The central bank on Friday said private sector borrowing is recovering on declined policy rates. It expects the island nation's northern and eastern provinces, which faced a 25-year war, to improve supply and favourably impact inflation. The central bank predicts a current account surplus this year for the first time since 1977, after it has recorded a surplus of $393 million in the first nine months of the year.
"Prospects for domestic economic activity have improved with the more favourable investment climate that now prevails and the gradual recovery of the world economy, supported by the relaxed monetary policy stance," the central bank said in a statement.
Sri Lanka's credit growth is likely to pick up in the ensuing period with the expansion of foreign assets, the bank said. Investor confidence in the $40 billion economy surged after the end of the war in May, attracting foreign investments into government debt and both listed and unlisted companies due to investor hopes of a rapid economic recovery after the war. The economy, still struggling to recover from the financial crisis and the civil war, is expected to expand at an eight-year low of 3.5 percent this year, from 6 percent last year, the central bank said.