CB's current standing deposit facility rate is 6% and its standing lending facility: 7.5%. CB reduced both of these rates after a 15 month lapse in April 2015.
An increase in policy rates will have a deleterious impact on credit growth, whereas a depreciation in policy rates will further exacerbate foreign exits from the government securities market due to its knock on effect of causing deflating pressure on government securities' yields and market rates, thereby making investments in such instruments unattractive to foreigners, they said.
Such foreign exits would cause further depreciating pressure on the rupee, already buffeted, due to such market forces impacting on it, a situation which the CB would want to avoid, the sources said.
A weak rupee would cause import prices to rise, which would have an adverse impact on the government, having to face an election anytime now. At the same time any increase in interest rates will have a negative impact on private sector credit growth, where the private sector is considered as the engine of economic growth.
One of the prime reasons for the Wickremesinghe government's defeat in the April 2004 election was due to a low interest rate regime prevailing then, they said. That impacted on retirees living off the fixed income market, they said. As a result Wickremesinghe lost their support at that poll. Under the circumstances it's unlikely that CB will tinker with rates at this juncture, the sources said.
Therefore, the CB, which is politicized and coming directly under Premier Ranil Wickremesinghe, is expected to make no change in policy rates for the second month running, they said. The best policy is for the CB to do nothing, which will be what they will do on 29 June, they predicted.
Courtesy: Ceylon Financial Times 19 June 2015