Sri Lanka holds policy rates steady

Sri Lanka's central bank on Monday held official interest rates steady at their highest levels since 2002, saying short-term interest rates were at a stable level. The overnight repurchase rate remains at 10.50 percent and the reverse repurchase rate was held at 12 percent.
"Within the monetary sector, reserve money, which is the operational target of the monetary policy, was maintained within the targeted level thus far in 2007 and it is poised to be well within the second quarter target as well," the central bank said in a statement.
"Market liquidity has remained broadly in balance and volatility in the short-term interest rates, particularly in the interbank call rate, has declined, reaching a stable level. These favourable trends are expected to continue further.
The central bank last raised rates by 50 basis points in February, the fifth rise since June 2006 aimed at curbing inflation. At 17.4 percent, the 12-month moving average for inflation is at its highest since 1994 because of costly oil imports and food price increases.
However, when compared with the year-earlier month, the rise in consumer prices slowed to 13.7 percent in May from 16.3 percent in April. Investors say the central bank has little room for manoeuvre. "As you can see, the level of activity (in the stock market) has simply died because no-one can borrow and invest," said Harsha Fernando, CEO at SC Securities in Colombo. "When one borrows at 20 percent or higher... you basically know you're going to lose money rather than make money."
"I don't think the central bank has much they could do, because (the government) is fighting a war and that's costing us," he added. "Fighting a war, world oil prices ... everything put together, it's an unfortunate situation."
Sri Lanka's annual economic growth slowed in the first quarter to 6.1 percent, the government said earlier this month, citing high oil prices and a contraction in the farm sector following a drought.
Sri Lanka's economy grew 7.4 percent in 2006, its highest growth rate since 1978, led by telecoms and industry. The central bank is forecasting economic growth of 7.5 percent this year. The central bank said the balance of payments stood at a surplus of $250 million by the end of May. The central bank's next monetary policy statement is due on July 23.