Sri Lanka's central bank kept its benchmark interest rate unchanged at the highest level in Asia after inflation accelerated more than expected in July. The Central Bank of Sri Lanka maintained its repurchase rate at 10.5 percent for a sixth straight meeting, according to a statement released in the capital Colombo today. The decision was predicted by all 14 analysts in a Bloomberg News survey. Higher borrowing costs and escalating violence between government forces and Tamil separatists have weakened the South Asian island's $26 billion economy, which expanded in the first quarter at the slowest pace in two years.The central bank's three rate increases between September and February helped slow inflation from a decade high of 20.5 percent in January. ``The central bank may not make any move that could be interpreted as loosening monetary policy,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. ``A further rise in interest rates may stifle economic growth some more.'' The Sri Lankan rupee was holding around a record low of 111.97 to the dollar at 11:35 a.m. in Colombo, according to First Capital Treasuries Ltd. The yield on the 7.6 percent bond due in August 2009 rose about 20 basis points to 17.4 percent. Sri Lanka's economy grew 6.1 percent in the three months to March from a year earlier, the central bank said June 29. Citigroup Inc. expects the economy to expand 6 percent this year from 7.4 percent in 2006.
Consumer prices in the capital Colombo rose 17.6 percent in July from a year earlier, after increasing 13 percent in June, due to higher oil and food costs. The central bank on July 3 said it will continue with steps to tame inflation to a single digit by the end of the year.
``The central bank measures have helped to maintain market liquidity broadly in balance and, hence, to stabilize the market interest rates,'' it said today. ``Revisions in administered prices, particularly the domestic fuel prices, would eventually contribute to contain the future inflationary pressures through its favorable impact on the fiscal management.'' Sri Lanka will freeze diesel prices and electricity and water tariffs for the rest of this year to help slow inflation, the state-run Daily News reported on Aug. 7, citing Prime Minister Ratnasiri Wickramanayake's office.
State-owned Ceylon Petroleum Corp. and Lanka IOC Ltd., the local unit of Indian Oil Corp., on July 29 lifted fuel charges for the fourth time in two months due to higher global oil costs. Sri Lanka generates about 65 percent of its electricity from oil-fired plants and imports all the fuel it needs to run them. A depreciating currency has increased import costs.
Sri Lanka plans to sell locally 60,000 metric tons of rice from its reserves to boost supplies and help reduce inflation, the government said on Aug. 6. President Mahinda Rajapaksa has increased spending on the army, navy and air force by 44 percent this year to a record 139 billion rupees ($1.2 billion) to help fight Tamil rebels.
That's likely to further widen a budget deficit that the Asian Development Bank estimates was equivalent to 8.9 percent of gross domestic product last year. Standard & Poor's on Aug. 8 raised its outlook on Sri Lanka's credit rating to ``stable'' from ``negative,'' noting improved state finances and limited fallout from the worst violence on the island after a 2002 cease-fire.
S&P affirmed Sri Lanka's B+ rating, four levels below investment grade. Higher borrowing costs have helped damp money supply and loan growth. Reserve money, one of the factors that fuels inflation, grew to 247.2 billion rupees in July, slower than the targeted 253.8 billion rupees, the central bank said on Aug. 2. Sri Lanka's exports increased 13 percent while imports rose 3.9 percent in the first half of 2007, narrowing the island's trade deficit, the central bank said in its statement today. The country posted a balance of payments surplus of $161 million by end-July as private remittances climbed. The island's reserves were $2.7 billion, it said.
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