September 28, 2016 / 3:22 AM / a year ago

UPDATE 1-Sri Lanka holds rates as past hikes curb credit boom

* C.bank keeps SDFR and SLFR unchanged for 2nd straight month

* Private sector credit growth high, but to slow by year-end

* Past policy tightening will slow credit growth - c.bank (Adds details, c.bank and economist’s comments, context)

By Shihar Aneez and Ranga Sirilal

COLOMBO, Sept 28 (Reuters) - Sri Lanka’s central bank held its key policy interest rates steady on Wednesday, a widely expected decision that analysts say suggested policy makers were keen to support a slowing economy even as they kept a tight leash on rampant credit growth.

The Central Bank of Sri Lanka, left the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) at 7.00 percent and 8.50 percent, respectively. The bank has tightened policy three times since December.

“Market interest rates, which increased in response to monetary tightening measures of the central bank, are expected to slow down credit expansion in the months ahead,” the central bank said in a statement, and underscored that it has sufficient measures in place to support economic activity.

Private sector credit growth was at 28.5 percent year on year in July, its highest since August 2012, but Central bank chief Indrajith Coomaraswamy said last month that he expected the credit expansion rate to slow to 18 percent by the end of 2016.

The on-hold decision, which was in line with a Reuters poll, comes after data last month showed the economy grew 2.6 percent on-year in the second quarter, slowing from 5.2 percent in the first quarter.

“They are very much focused on the growth after the release of the second quarter numbers. There isn’t much emphasis on inflation and credit. I think still they are willing to wait,” Shiran Fernando, an analyst at Colombo-based Frontier Research.

The central bank has estimated this year’s economic growth at around 5 percent, edging up from last year’s 4.8 percent.

The previous rate increases were aimed at curb stubbornly high private sector credit growth that has driven up inflation, while policy makers were also keen to fend off pressure on a fragile rupee.

Inflation slowed in August to 4.0 percent on-year from the previous month’s 5.5 percent.

The central bank has raised both the SDFR and the SLFR by 50 bps each in February and July. That followed an increase of 150 bps in commercial banks’ statutory reserve ratio (SRR) in December.

The rupee has come under pressure due to lower interest rates, higher imports, and foreign outflows from government securities last year. But the currency steadied after the central bank raised $1.5 billion from a sovereign bond sale in July. (Reporting by Shihar Aneez; Editing by Shri Navaratnam)

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