* Decision intended to boost sustainable growth - cbank
* Fiscal steps, inflows “appear to have” reduced rate pressure
* Higher rates, bad weather, hit growth (Adds detail, comment)
By Shihar Aneez and Ranga Sirilal
COLOMBO, June 23 (Reuters) - Sri Lanka’s central bank kept its benchmark interest rates steady on Friday, as forecast, saying current monetary policy was appropriate as it expected the economy to recover in the second half of the year.
The central bank kept the standing deposit facility rate (SDFR) at a four-year high of 7.25 percent and the standing lending facility rate (SLFR) at 8.75 percent, the highest since July 2013.
“The decision of the Monetary Board is consistent with the objective of maintaining inflation at mid-single digit levels over the medium term and thereby facilitating a sustainable growth trajectory,” the central bank said in a statement.
A Reuters poll this week showed economists largely expected the central bank to keep both rates unchanged.
Colombo’s fiscal consolidation process and inflows to the government appear to have substantially reduced the pressure on interest rates in the domestic securities market, it said.
The central bank has raised rates four times between December 2015 and March this year to contain inflation, curb rapid private-sector credit growth, and prevent sharp depreciation in the rupee currency.
The measures have already hit growth, which was 4.4 percent last year versus 4.8 percent in 2015. The economy grew at 3.8 percent in the March quarter, slowing from 5.3 percent in the previous quarter.
Full-year growth is expected to be hit by extreme weather. Sri Lanka had its worst drought in 40 years in the first quarter and then heavy rain last month triggered the worst flooding in 14 years.
Krystal Tan, Asia economist at Capital Economics, said the need for further rate hikes was becoming less pressing.
“As the impact of earlier monetary policy tightening continues to filter through to the economy, inflation and credit growth are likely to gradually ease further,” she said.
Consumer prices rose 6.0 percent in May from a year earlier, slowing from the previous month’s 6.9 percent.
Private sector credit growth was at 20 percent in March, decelerating from 20.4 percent a month ago.
Tan, however, said a key concern was the weakening of the rupee.
“If, as we expect, the Fed tightens monetary policy more aggressively than the market expects over the coming months, there is a risk that this could lead to further falls in the (rupee) currency against the U.S. dollar.”
She said the central bank ”would have little choice but to raise rates further if the currency came under significant downward pressure, given Sri Lanka’s high foreign debt.
The Sri Lankan rupee fell 3.9 percent in 2016 and has eased around 2.3 percent so far this year, pressured by dollar demand from importers and foreign investors pulling out of government bonds in the first quarter.
The central bank stooped defending the rupee after it missed an end-December reserve target set by the IMF. (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Eric Meijer)