* Tightening is precautionary measure against inflation -
* U.S. rate hike, foreign outflows led to the decision -
* Economists were nearly evenly split over policy outcome
* Central bank revises down growth target to 5-5.5 pct
(Adds cenbank governor comment)
By Shihar Aneez and Ranga Sirilal
COLOMBO, March 24 Sri Lanka's central bank
raised interest rates for the first time in eight months on
Friday, saying tighter policy was a precaution against a
build-up of inflationary pressures.
Its fourth tightening step in 16 months comes two weeks
after the International Monetary Fund (IMF) urged authorities to
tighten monetary policy amid heavy capital outflows as foreign
investors sold government securities this year.
Policymakers face a tricky balancing act as the outflows
have put renewed pressure on the rupee, but higher
borrowing costs are likely to further cool the economy.
Economic growth slowed to a three-year low of 4.4 percent in
2016, from 4.8 percent the previous year.
The central bank later revised down growth target for 2017
to 5-5.5 percent from 5.5-6 percent.,
"We are not happy about monetary side developments and
credit growth has not slowed as much as we expected," Central
Bank Governor Indrajit Coomaraswamy told reporters in Colombo.
The central bank raised rates by 25 basis points, pushing
the standing deposit facility rate (SDFR) to a four-year peak of
7.25 percent and the standing lending facility rate (SLFR) to
8.75 percent, its highest since July 2013. (bit.ly/2oaPuGO)
The rate hike was necessary "to contain the build-up of
adverse inflation expectations and the possible acceleration of
demand side inflationary pressures through excessive monetary
and credit expansion," the central bank said in a statement.
A Reuters poll this week showed economists were split on a
possible rate increase.
"There are external pressures like the U.S. raising interest
rates, bond outflows and IMF pressure to tighten monetary
policy," said Yohan Samarakkody, head of research at SC
Securities, while adding that the tightening pace was a bit too
The IMF on March 7 urged the central bank to tighten
monetary policy if credit growth or inflation do not ease.
The central bank last tightened monetary policy in July.
Private sector credit growth remains stubbornly high, which
has added to price pressures. Credit grew 20.9 percent
year-on-year in January, compared with 21.9 percent in December.
Coomaraswamy expected the pace to slow to 15 percent by
Inflation in February hit a record high, pushed up by the
impact of a lingering drought.
The island nation's government has kept a tight leash on
fiscal policy to trim the budget deficit in line with a $1.5
billion IMF loan condition.
Foreign investors net sold government securities worth 63.3
billion rupees ($417.8 million) so far this year, exerting
pressure on the currency.
The rupee has fallen 1.4 percent so far this year
after a 3.9 percent slide last year.
(Editing by Jacqueline Wong and Kim Coghill)