By Natasha Brereton Of DOW JONES NEWSWIRES
SINGAPORE (Dow Jones)--Sri Lankan interest rates are now at a "comfortable level," the country's central bank governor said Monday, a day before the central bank meets to set monetary policy.
Ajith Nivard Cabraal told Dow Jones Newswires that a future loosening in policy couldn't be ruled out, while a tightening was "very, very unlikely" anytime soon. He also said Sri Lanka's economy has been able to cope with the rupee's rise over the past year, adding that the authorities would continue to ensure currency moves were orderly.
In January, the central bank unexpected cut its two key policy rates, lowering the repo rate by 25 basis point to 7% and the reverse repo rate by 50 basis points to 8.5%.
"We are now at a comfortable level," Cabraal said in a telephone interview. "We don't really see too much difficulty in maintaining our overall policy," he added.
Cabraal said the fact that Sri Lanka hadn't loosened policy as drastically as some of its Asian neighbors during the recent global economic downturn, as it factored in future inflationary risks, gave it "additional space" now.
On the country's funding plans, Cabraal said that a Sri Lankan rupee- or euro- denominated international bond issue would be possible alternatives to dollar bonds, and that the authorities could move quickly with a sale if the decision was taken.
-By Natasha Brereton, Dow Jones Newswires, +65-6415-4044, natasha.brereton@dowjones.com
- Interest rates at 'comfortable level'
- Can't rule out rate cut, but hike unlikely
- Better to support economic momentum than risk growth
- Rupee-, dollar or euro-denominated bonds are funding options
(Adds more comments, context.)
By Natasha Brereton Of DOW JONES NEWSWIRES
SINGAPORE (Dow Jones)--Sri Lankan interest rates are currently at a "comfortable level," the governor of the country's central bank said Monday, a day before it meets to set monetary policy.
Ajith Nivard Cabraal told Dow Jones Newswires that a tightening in policy was "very, very unlikely" anytime soon, but a future loosening can't be ruled out.
He also said Sri Lanka's economy has coped well with the local rupee's rise over the past year, and that authorities would continue to ensure currency moves are orderly.
Cabraal said the fact that Sri Lanka hadn't loosened policy as drastically as some of its Asian neighbors during the recent global economic downturn, as it factored in future inflationary risks, gave it "additional space" now.
"We are now at a comfortable level," Cabraal said in a telephone interview. "We don't really see too much difficulty in maintaining our overall policy."
The central bank surprised investors when it cut its two key policy rates in January--despite a pickup in inflation at the end of 2010--lowering the repo rate 25 basis points to 7% and the reverse repo rate 50 basis points to 8.5%.
That came as authorities around Asia--including Indonesia, China, India, Taiwan, Thailand, Singapore and South Korea--have been tightening policy to curb inflationary pressures.
Cabraal said the central bank would monitor gains in global food and commodity prices "very closely," as well as the impact from some domestic flooding.
But he said the huge amount of spare capacity in Sri Lanka's economy, following three decades of conflict that ended in 2009, meant it has been able to enjoy strong growth without feeling the same inflationary pressures as some of its neighbors.
"In that context, it is better for us to move forward with the greater momentum than...take a decision which can put the economy into a different mode," Cabraal said. "We do recognize the risk, but we believe that the risk would be mitigated to a great extent, and therefore our considered viewpoint is that we would be comfortable in seeing the growth momentum being maintained."
Sri Lanka's annual consumer price inflation declined to 6.8% in January from 6.9% in December, although annual average inflation picked up to 6.0% from 5.9%.
Cabraal said it was too early to say if another rate cut was in the cards, as the central bank first wants to see the impact of prior loosening fully absorbed. But he said he wouldn't rule out a cut.
A round of tightening, however, is "very, very unlikely" in the near term, Cabraal said.
"From what I see now, even though we do have volatile conditions, I can't really see anything so extraordinary that would make us take that decision," he said.
The central bank forecasts output growth of 8.5% and inflation of 4%-6% in 2011, and Cabraal said he was "fairly confident" it would be possible to achieve those figures.
Cabraal said the performance of Sri Lanka's economy over the past year has given people confidence that the country is able to cope with appreciation in its currency, the rupee.
"Our exchange-rate policy has been that we would allow a trend to take place, but only at a reasonable pace so that it does not disturb economic activity," the governor said, adding that the central bank didn't want investors to be taken by surprise by either an appreciation or a depreciation.
"We will continue to use that policy for the time being," he said.
Regarding government funding, Cabraal mentioned a rupee- or euro- denominated international bond issue as a possible alternative to dollar bonds.
"We have been comfortable issuing our bonds in U.S. dollars. But going forward, we will take a look to see what the other options are," he said.
There was strong demand for the government's $1 billion bond issue last September. That followed a heavily oversubscribed sale of $500 million in sovereign bonds in October 2009.
Cabraal said some investors might see the gradual appreciation of the Sri Lankan currency as a benefit of holding rupee bonds.
That option "has been suggested to us by many investment banks, and we are examining these proposals," he said.
The authorities will make a decision about bond issuance after evaluating options and market conditions more closely, and can move quickly with a sale once a decision is taken, Cabraal said.
-By Natasha Brereton, Dow Jones Newswires, +65-6415-4044, natasha.brereton@dowjones.com
source - online.wsj.com
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