* Economy gradually responds to past measures - c.bank
* C.bank assures policy changes "if required"
* Analysts expect rate hike sooner than later
* Rate hike needed to ease pressure on rupee - economist
(Adds details, quotes)
By Shihar Aneez and Ranga Sirilal
COLOMBO, Feb 7 Sri Lanka's central bank kept its
key rates steady on Tuesday for a sixth straight month, but
flagged possible "corrective measures" in the months ahead in a
sign further tightening might be on the cards to temper
inflation pressures and safeguard a fragile rupee.
The Central Bank of Sri Lanka (CBSL) left the standing
deposit facility rate (SDFR) and the standing lending facility
rate (SLFR) at 7.00 percent and 8.50 percent, respectively.
It has tightened monetary policy three times since December,
2015, while the government has kept a tight leash on fiscal
policy in the past year to trim the budget deficit in line with
a condition for a $1.5 billion International Monetary Fund loan.
The central bank said the economy is gradually responding to
the stabilisation measures adopted by CBSL and the government
since late 2015.
"However, close monitoring of macroeconomic developments is
necessary in the period ahead, with a view to adopting further
corrective measures, if required," it said in a statement.
Analysts said further tightening in policy looks inevitable
even as private sector credit growth has slowed slightly to 21.9
percent on-year by end of 2016, from a near four-year high of
28.5 percent in July.
"Looking ahead, tighter monetary policy is needed to contain
rapid credit growth and rising price pressures," Krystal Tan
Asia economist at Capital Economics said in a client note.
A Reuters poll last week showed economists were split on
their views. Seven out of 13 economists surveyed predicted the
central bank would keep both its SDFR and SLFR unchanged. The
rest expected at least a 25-basis-point rate hike in both policy
The prior tightening steps have dragged on the economy,
which grew at a slower 4 percent annual pace in the first nine
months of 2016 compared to 5.7 percent in the same period the
Policy makers face a tricky balancing act as the rupee
comes under fresh selling pressure, hurt by capital
outflows thanks to the Federal Reserve's more hawkish policy
outlook and uncertainty caused by U.S. President Donald Trump's
policies on trade, immigration and international relations.
The Sri Lanka rupee fell 3.9 percent in 2016 and
has eased around 0.5 percent so far this year.
Sri Lanka's consumer prices rose to a six-month high of 5.5
percent in January from a year earlier, accelerating from the
previous month's 4.5 percent under a revised calculation method
that came into effect this last month.,
"Although private sector credit growth has slowed in recent
months, it remains at an unsustainable rate. Interest rate hikes
will also be needed if the CBSL wants to support the currency,
particularly as we expect the US Fed to raise interest rates
further than markets currently anticipate this year," Tan said.
(Editing by Shri Navaratnam)