Friday, February 27, 2009

Sri Lanka’s Inflation Rate Drops to Lowest in 3 Years

Feb. 27 (Bloomberg) -- Sri Lanka’s inflation slowed more than economists expected to the lowest in three years, making it more likely the central bank will cut interest rates to bolster the island’s economic growth.

Consumer prices in the capital Colombo rose 7.6 percent in February from a year earlier, after increasing 10.7 percent in January, the statistics agency said on its website today. That was the lowest reading since January 2006, when inflation was 7.3 percent. Economists expected an increase of 8.6 percent.

Governor Nivard Cabraal may add to two interest rate cuts in as many months to pump cash into the banking system and help shield the economy from the global recession. The Central Bank of Sri Lanka this week reduced the amount of money that lenders need to set aside as deposits for the third time since October after lowering the overnight lending rate on Feb. 11.

“The sharper decline in inflation is giving enough legroom to the central bank to cut interest rates going forward,” said Sumith Perera, an analyst with Eagle NDB Co., the nation’s biggest mutual fund company. “Lower interest rates will help boost growth.”

The central bank on Feb. 24 reduced the statutory reserve requirement to 7 percent from 7.75 percent, a move aimed at releasing 9 billion rupees ($79 million) into the financial system, the bank said in a statement.

‘Less Stringent’

The unexpected cut in the reserve requirement followed a reduction in the overnight lending rate or the so-called penal interest rate to 16.5 percent from 17 percent on Feb. 11. The repurchase rate was also reduced by a quarter of a percentage point to 10.25 percent.

The penal rate now serves as a ceiling on overnight interest rates and as a benchmark rate for other market rates, according to the central bank. A basis point is 0.01 percentage point.

“We have room for less stringent monetary policy,” Governor Cabraal said Feb. 20. Cabraal expects inflation to slow to 5 percent by the end of the year.

To support growth, Sri Lanka in December unveiled a 16 billion rupees ($140 million) stimulus package that includes cutting retail fuel prices and removing some taxes.

Fitch Ratings today cut Sri Lanka’s credit rating outlook to negative from stable because of the “marked” decline in the nation’s foreign exchange reserves. The rating agency affirmed Sri Lanka’s long-term foreign currency rating at B+, four levels below investment grade, according to an e-mailed statement.

The nation’s economic growth slowed to 6.3 percent in the third quarter of 2008 from 7 percent in the previous three-month period as declining overseas demand eroded the nation’s tea, rubber and textile exports.

Still, Cabraal said Feb. 7 that Sri Lanka’s economy may expand faster than previously estimated in 2009 as the government adds stimulus measures and as prospects of peace spur investment. Growth may be 6 percent this year, more than an earlier forecast of between 5 percent and 5.5 percent, Cabraal told Bloomberg News in an interview.

Source: Bloomberg