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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka to keep rates on hold till September: report

Sri Lanka to keep rates on hold till September: report

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sriranga

sriranga
Co-Admin

Wall Street Journal: Sri Lanka’s Central Bank might cut short-term interest rates again in September or October if inflation continues to fall as expected, bank Governor Ajith Nivard Cabraal said Monday.

“If we feel very confident with the events of the next few months, then we would feel a little more inclined to relax further,” Cabraal said in an exclusive interview with The Wall Street Journal.

“It will be a decision that will be taken around September, October; then we will really give it a careful look,” he added.

For the time being, though, Cabraal said monetary policy is likely on hold.

The Sri Lankan Central Bank reduced its target short-term borrowing rate in December from 7.75% to 7.5%, and then reduced it an additional half percentage point in May to 7%.

The next step will depend largely on how inflation performs. The bank is aiming for inflation to fall to around 5% or 5.5% by the end of this year, from 6.8% in June, and for the economy to grow by 7.5%, from 6.4% in 2012.

A big wild card for emerging-market central banks in the months ahead will be US monetary policy.

Many emerging markets have been buffeted in recent weeks by the US Federal Reserve‘s discussions of exiting from its easy-money policies.

The Fed’s $ 85 billion-a-month in bond purchases, launched in September, lowered US long-term interest rates, triggering a surge of capital into fast-growing emerging markets with higher rates.

The Fed sparked a reversal in those flows in June when the bank said it could begin reducing its bond buying later this year and end the program altogether by mid-2014 if the US economy improves as Fed officials expect. The news caused investors to restructure their portfolios, stoking volatility in currency, bond and equity markets around the globe.

Cabraal, who was in the US to brief investors on Sri Lanka’s finances, said the country is largely prepared for the Fed’s exit because it has tried to limit its exposure to swift changes in capital flows.

Sri Lankan authorities have been careful not to open up their debt markets too wide, too fast, he said, focusing on international investors looking for long-term exposure.

US investors have tended to buy long-term Sri Lankan debt, Cabraal said.

US pension funds that need to match up their long-term liabilities, for example, are far less likely to sell out of Sri Lanka in the near term, added N.W.G.R.D. Nanayakkara, Sri Lanka’s Superintendent of Public Debt.

“Many have said they want to hold until the bonds mature,” Nanayakkara said.

The Central Bank has also doubled its cash reserves in the last several years. It is planning to continue stockpiling foreign-exchange reserves over the next several years to give it an even bigger buffer against market volatility.

Furthermore, the Government in Colombo has been steadily cutting the budget deficit since the end of the civil war in 2009.

“Our credit story has been convincing,” Cabraal said. Investor demand, strong growth, a declining deficit and the end of conflict has pushed borrowing costs down several percentage points.

His bank isn’t the only one preparing for a Fed exit: Cabraal said that central bank governors in the region have been swapping strategies at recent meetings.

The Governor said his biggest fear in the global economy is the euro-zone crisis, where authorities haven’t been able to tame prolonged recession that threatens to deteriorate into something worse. Europe is one of Sri Lanka’s largest export markets.

If a harbinger for other emerging markets, Colombo’s response should be a cautionary tale for Europe.
Cabraal said many firms are now looking for alternative export markets: the currency union’s ongoing problems are spurring Sri Lankan officials to start negotiating a free-trade agreement with China. The bank also wants to expand its reserve holdings of Chinese yuan, he said.
http://www.ft.lk/2013/07/17/cb-chief-in-us-to-brief-investors-tells-wsj-rate-cut-possible-in-september-or-october/

http://sharemarket-srilanka.blogspot.co.uk/

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics

July 17, 2013 (LBO) - Sri Lanka expects to keep rates on hold till September, and policy rates will be kept unchanged this month, a media report said.

"We don’t need to see any changes right now,” Cabraal was quoted as saying in Bloomberg newswires in a July 16 interview.

"The chances are that what we have needed to do we have done. We think that the steps that we have taken should take us at least until September."

Sri Lanka's rupee has weakened over June and has dropped further in July after liquidity flooded money markets from a reserve ratio cut.

A depreciating currency can add to inflation, though external conditions are also favourble with the Fed expected to pull back from its quantity easing program.

Cabraal said he was comfortable with the inflation outlook.

"We had to ensure that the policy measures that we have put in place now are not reversed too quickly and there’s no need to reverse it as well because the inflation outlook also seems to be benign,” he said.

"In those conditions I see that we could be more toward the relaxation side without having to pull back in the foreseeable future.
http://www.lankabusinessonline.com/news/sri-lanka-to-keep-rates-on-hold-till-september:-report/408790086

K.Haputantri

K.Haputantri
Co-Admin

This news would have some positive impact on the share market. I hope they could keep on doing this rate cutting after september elections. Only concern is its impact on balance of payment & inflation issue. If Sri Lankans can satisfy with local products with increased liquidity, inflation can be controlled. Be Sri Lankan buy Sri Lankan products. No other way for progress.

Backstage

Backstage
Moderator
Moderator

Cabraal seems to be hinting that there will be positive developments in the next two months.Suspect 

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