Sri Lanka holds rates as inflation eases

Sri Lanka's central bank on Friday kept its policy rates unchanged for a sixth straight month in line with expectations, saying improved supply conditions as a result of the harvest will ease headline inflation in coming months. The repo rate and reverse repo rate were left unchanged for a sixth month at 7.0 percent and 8.5 percent respectively, in line with a Reuters poll. .
"Headline inflation is expected to decline further in the months approaching as price developments as a result of continued domestic supply side improvements are expected to offset price adjustments due to movements in international commodity prices," the central bank said in a statement. Local food and vegetable supply have improved and their prices have stabilised after a short supply following by two rounds of floods in the first two months on 2011. Annual inflation slowed to 7.1 percent in June from a year earlier, easing from 8.2 percent in May on a new index introduced last month.
The $50 billion economy grew 7.9 percent year-on-year in the first quarter and is aiming a record 8.5 percent full-year growth from last year's 8 percent as the island nation emerges from the end of a three-decade war that ended in May 2009. The central bank reduced 364-day T-bill yield by 10 basis point on Wednesday, leaving some economists to speculate a surprise rate cut as inflation declining, largely due to improved supply and also due to change in weightage under the new index.
"There were some speculation on the inflation path. We want to be absolutely clear in giving that signal. That's why we have maintained policy rates even when inflation is dipping," Ajith Nivard Cabraal, the central bank governor told Reuters. Analysts and economists expect inflation to accelerate later in the year due to rising global oil and commodity prices. "Headline inflation may remain lower, but we see core inflation rising due to demand-driven pressure," said Amal Sandaratne, an economist at Frontier Research. "We expect the policy rates to remain the same for the rest of this year," he said, adding that the expected rise is mainly on account of the low base from a year ago.
Markets did not react to the policy rates announcement as the decision was largely expected, with Sri Lankan bourse was up 0.4 percent, largely due to bargain hunting after the recent fall on forced selling, and the rupee currency was steady at 109.48/50 a dollar at 0500 GMT. "The Central Bank will continue to closely monitor monetary developments with a view to taking appropriate and timely policy action if required," the central bank said in its statement.