* Economic growth slows after past tightening measures
* Inflation, credit growth expected to slow towards end
* C.bank raised 25 bps in March to contain inflation
* Rupee stabilising on inflows, borrowings - analysts
(Adds details, quotes)
By Shihar Aneez
COLOMBO, May 9 Sri Lanka's central bank kept its
benchmark interest rates unchanged on Tuesday, as expected, and
said current monetary policy is appropriate with inflation
projected to decelerate gradually this year after March's rate
The central bank kept the standing deposit facility rate
(SDFR) at a four-year peak of 7.25 percent and standing lending
facility rate (SLFR) at 8.75 percent, its highest since July
It said inflation is expected to slow gradually to "desired
mid-single digit levels" by 2017, although there could be some
monthly fluctuations due to short-term supply-side disruptions
and base effects of 2016 tax revisions.
The central bank raised both key rates in its last monetary
policy meeting in March to contain inflation expectations. The
past tightening has weighed on economic growth, which slowed to
4.4 percent in 2016 from 4.8 percent in the previous year.
"As market interest rates remain substantially high, it is
expected that credit...will decelerate to the envisaged levels
by end 2017," the central bank said.
Sri Lanka's private sector credit growth remains stubbornly
high, which has exacerbated inflation. Credit grew 20.4 percent
year-on-year in March, compared with 21 percent in February.
The bank, however, warned it would closely monitor
macroeconomic developments in the period ahead "in order to
adopt further measures, if required."
A Reuters poll last week showed economists mostly expected
the central bank to keep both rates unchanged.
Krystal Tan, Asia economist with Capital Economics, said Sri
Lanka may face a risk of rupee depreciation if the U.S. Federal
Reserves tightens monetary policy more aggressively than the
market expects over the coming months.
"Sri Lanka is especially vulnerable to a weak currency
because of its high level of foreign currency debt, which is
equivalent to more than 50 percent of GDP," Tan said in a market
"A low level of foreign exchange reserves means the central
bank would have little choice but to raise rates further if the
currency came under further downward pressure."
The central bank has already tightened monetary policy four
times since December 2015 to fend off pressure on the fragile
rupee and curb stubbornly high credit growth that has
pushed up inflation as Sri Lanka faces twin crisis of balance of
payments and debt.
The IMF on March 7 urged the central bank to tighten
monetary policy if credit growth or inflation did not abate.
Sri Lanka's consumer prices rose 6.9 percent in April from a
year earlier, slowing from the previous month's record high of
The rupee has eased around 1.5 percent so far this year
after falling 3.9 percent in 2016, pressured by dollar demand
from importers and foreign investors' withdrawing from
government securities in the first three months.
(Additional reporting by Ranga Sirilal; Editing by Sam Holmes)