Thursday, April 22, 2010

Special report on Sri Lanka - Bloomberg

Sri Lanka Refrains From Raising Rates to Boost Growth (Update2)  By Anusha Ondaatjie

April 22 (Bloomberg) -- Sri Lanka kept its interest rates unchanged for a fifth straight month to support an economic recovery that helped President Mahinda Rajapaksa win parliamentary elections this month.

The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent, its lowest level since August 2005, according to a statement on the Colombo-based bank’s Web site today. The repurchase rate was also maintained at 7.5 percent.

Rajapaksa, whose United People’s Freedom Alliance won 144 seats in the 225-member assembly in the April 8 vote, is counting on a construction boom to boost growth after he ended a quarter-century civil war last year. Governor Nivard Cabraal can avoid joining Asian policy makers in raising rates as inflation in Sri Lanka is half the average of the past five years.

“Relatively contained inflation and a bias to support growth should keep policy rates anchored well into 2010,” Prakriti Sofat, an economist at Barclays Capital in Singapore, said before the decision.

The Sri Lankan rupee has gained 0.4 percent this year, less than the currencies of Malaysia, India and Australia, where policy makers have raised interest rates.

The central bank is targeting economic growth of 6.5 percent in 2010, which would be the fastest pace in three years. Consumer prices in the capital, Colombo, rose 6.3 percent in March from a year earlier. Inflation averaged 12.6 percent in the five years through 2009.

India’s Move

Policy makers in neighboring India raised interest rates for the second time in a month on April 20 and ordered lenders to set aside more cash as reserves to fight inflation.

Consumer prices paid by industrial workers in India rose 14.9 percent in February from a year earlier. The nation’s wholesale-price inflation rate reached a 17-month high of 9.9 percent in March.

Sri Lanka’s central bank said in its annual report released April 5 that a revival in consumer demand could fan inflation this year, and that would need to be contained through “appropriate demand management policies.”

The bank said today it will “take appropriate action if necessary” amid high excess rupee liquidity in the money market. “Growth in the domestic economy is expected to gain momentum during the year” as credit demand by private firms picks up, the global economy recovers and investor confidence in the island increases, it said.

Peace has prompted companies to expand in the $41 billion Indian Ocean island’s economy. John Keells Holdings Plc, the country’s biggest diversified company, said March 24 political stability has enabled the group to resume expansion of its 40- store grocery retail chain.

Sri Lanka’s gross domestic product rose 6.2 percent in the three months ended Dec. 31 from a year earlier, the fastest pace in five quarters. Rajapaksa, who was reelected for a six-year term in presidential elections in January, has pledged to spend $1 billion annually on ports, roads and power plants.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at
Last Updated: April 21, 2010 23:22 EDT

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