Tuesday, January 19, 2010

Sri Lanka Keeps Rates at Five-Year Low to Spur Growth

Jan. 19 (Bloomberg) -- Sri Lanka’s central bank Governor Nivard Cabraal kept benchmark interest rates unchanged at a five-year low to spur investments and aid economic growth after the end of a 26-year civil war.

The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent, the Colombo-based bank said. The repurchase rate was also maintained at 7.5 percent. The economy will expand more than 6 percent this year, Cabraal said in a Bloomberg Television interview today.

“The rate is sufficient to stimulate growth as well as ensure that any risk of inflation is also curtailed,” Cabraal said. “We need not have any fear” of inflation now, he said.
“The rate is sufficient to stimulate growth as well as ensure that any risk of inflation is also curtailed,” Cabraal said. “We need not have any fear” of inflation now, he said.

The island’s biggest companies including John Keells Holdings Plc and Aitken Spence & Co. are expanding their hotel and shipping businesses to take advantage of a rebound in the $41 billion economy. President Mahinda Rajapaksa is holding an election two years before his mandate expires after the defeat of the Liberation Tigers of Tamil Eelam rebels in May helped push growth above 4 percent in the third quarter.

“The central bank wants loan books to grow and money to flow into the economy,” Saminda Weerasinghe, research manager at Acuity Stockbrokers Pvt. in Colombo, said before the report. “Inflation pressures aren’t that great.”

Inflation Forecast

Sri Lanka’s inflation rate was 4.8 percent in December, less than half that in January 2009. Today’s rate decision took into consideration a potential pickup in inflation, Cabraal said in the interview before the central bank policy statement.

“Projections of inflation for 2010 indicate benign inflationary pressures, enabling inflation to be in single digits by year end,” the central bank said in the statement.

The economy may grow 7 percent in 2010, the fastest pace in four years, spurred by company investments and construction of new roads, ports and power plants, Cabraal said Jan. 4.

John Keells, Sri Lanka’s biggest diversified company, said in November it will invest about $100 million to build new resorts to benefit from a tourism revival after the war.

Aitken Spence, Sri Lanka’s biggest operator of resorts, plans to expand its hotel and shipping businesses while Commercial Bank of Ceylon Plc, the nation’s biggest private lender by assets, aims to extend more loans in the northern and eastern regions, which were recaptured from the Tamil Tigers.

Presidential Polls

Rajapaksa scheduled presidential elections to be held on Jan. 26, betting the economy’s recovery will boost his popularity.

Cabraal has kept interest rates unchanged for two straight months. He lowered the central bank’s reverse repurchase rate by 75 basis points and the repurchase rate by 50 basis points in November. A basis point is 0.01 of a percentage point.

“We have seen a sharp increase in lending during the past month which indicates to us there is stimulation taking place,” Cabraal said. “If we find there is a bubble being formed or too much liquidity being created, then we would think it’s time for us to increase the rates. But we haven’t seen any such danger right now.”

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, jumped 125 percent last year, outperforming the rest of Asia and trailing only Russia worldwide, on prospects of an economic rebound in the Indian Ocean island.

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid package in July, expects the island’s economic growth and credit demand to pick up.
To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

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