November 7, 2017 / 3:42 AM / in 9 months

UPDATE 2-Sri Lanka cbank lowers growth estimate after holding rates steady

* Tight fiscal, monetary policies, weather weigh on growth

* Growth forecast reduced to 4-4.5 pct from earlier 4.5 pct

* Cbank chief says private credit not going for investments

* Finance Minister to present 2018 budget on Thursday

* Analysts expect GDP growth to remain subdued (Adds growth forecast details, cenbank chief comments)

By Shihar Aneez

COLOMBO, Nov 7 (Reuters) - Sri Lanka’s central bank on Tuesday revised down its economic growth to between 4 percent and 4.5 percent for this year after holding its key interest rates steady as it focuses on supporting a faltering economy hit by extreme weather.

Central Bank Governor Indrajit Coomaraswamy after the policy announcement said the island nation would see an economic growth of between 4 percent and 4.5 percent this year, slower than the earlier target of 4.5 percent.

“It will be probably higher than 4 percent. I don’t know (if) we can make it 4.5 percent,” Coomaraswamy told reporters in Colombo.

Analysts expected 2017 growth will significantly undershoot the central bank’s forecast, although Prime Minister Ranil Wickremesinghe has predicted up to 5 percent growth for the year.

The decision to hold policy comes despite mounting price pressures, as policymakers seek to support economic growth, which has struggled following a series of rate hikes that commenced in 2015.

“The decision ... 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 its policy statement.

Although the economy remains vulnerable to weather-related disturbances and rising global commodity prices, reforms and foreign inflows over the medium term are expected to improve economic resilience, it said.

As widely expected, the central bank kept the standing deposit facility rate (SDFR) at 7.25 percent and standing lending facility rate (SLFR) at 8.75 percent - both at over four-year highs.

The policy decision also comes ahead of the 2018 budget, which the finance minister is scheduled to present in parliament on Thursday and is expected to introduce more reforms to boost jobs.

The central bank has had to balance the need to temper price pressures to support an economy hit by extreme weather. The country was hit by the most severe drought in 40 years in the first quarter and the worst flooding in 14 years in May.

Private-sector credit grew 17.5 percent on-year in September, slowing from 18 percent a month ago, but much lower than a near four-year high of 28.5 percent hit in July 2016.

“We see a sticky downward growth in credit but we don’t see the credit going for investments. Net credit for the government is also high,” Coomaraswamy said.

“Some credit, like for agriculture, has not given much output,” he said when asked why higher private-sector credit growth was not feeding into higher economic growth.

Consumer inflation accelerated a record 7.8 percent last month from a year earlier, up from the previous month’s 7.1 percent.

The International Monetary Fund said in September the central bank should “stand ready to head off pressures on inflation and credit growth”.

Previous rate increases and tight fiscal policies have dragged on growth with gross domestic product (GDP) expanding just 3.9 percent in the first half of 2017 from a year earlier.

Analysts say the central bank is now focusing more on stoking GDP growth than taming credit with the economy expected to see weaker momentum due to floods and drought.

“The decision makes sense as inflation is up due to supply-side shocks and increased taxes. If the rates are reduced, there could be unnecessary credit demand,” said Sanjeewa Fernando, strategist at CT CLSA Securities. (Reporting by Shihar Aneez; Editing by Sam Holmes and Gopakumar Warrier)

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