UPDATE 1-Sri Lanka keeps rates unchanged as expected
* Growth target still reachable despite global slowdown - c.bank
* Inflation expected to ease with domestic supply improvements
* Weaker rupee, drought drive inflation (Adds quotes, details)
By Shihar Aneez
COLOMBO, Aug 7 (Reuters) - Sri Lanka kept its policy rates unchanged on Tuesday, as expected, aiming to lift economic growth amid a spike in inflation that the central bank attributed to adverse weather conditions disrupting domestic food supplies.
The central bank held the repurchase and reverse repurchase rates at 7.75 and 9.75 percent, respectively, for a fourth straight month, the highest levels in more than two years and in line with market expectations.
The government in March revised down its 2012 growth estimate for the country's $59 billion economy to 7.2 percent from an earlier 8 percent, after a record 8.3 percent expansion last year.
The central bank has raised policy rates twice since February to the highest level in more than 2-1/2 years, ordered commercial banks to cap lending this year at 18 percent above their total 2011 loans, and allowed a more flexible exchange rate to avert a balance-of-payments crisis.
"The amount of credit that could still be disbursed in the second half of the year by licensed banks even with the credit ceiling in place, could comfortably support the revised economic growth path," the central bank said in a statement. "In that context, the growth estimates still seem to be within reach, notwithstanding the gloomy global conditions."
The central bank said growth in private sector lending by commercial banks had declined to 11.4 percent in the first half of this year compared with 18.1 percent in the second half of 2011.
NEAR DOUBLE-DIGIT INFLATION
Annual inflation hit a 42-month high of 9.8 percent in July from 9.3 percent a month earlier. The central bank ruled out any monetary policy response to the spike at the time, saying that it was due to supply constraints.
The central bank said although there could be some transitory inflationary pressures in the near term, improvements in domestic supply conditions and tight monetary measures were expected to contain inflation at single-digit levels for the remainder of the year.
Analysts have raised concerns over rising core inflation, which excludes volatile food and energy prices, after it hit a 10-month high of 6.0 percent in July from 5.8 percent a month earlier. High inflation is fed by an ailing rupee that has depreciated more than 16 percent since November and drought sweeping the food grain growing parts of the island nation. (Reporting by Shihar Aneez; Editing by Chris Lewis)
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