Sri Lanka on ‘even keel’; to watch inflation, exchange rate before rate cuts: CB Governor

COLOMBO (EconomyNext) – Sri Lanka was on an ‘even keel’ but any rate cuts in like with lower inflation will be balanced against exchange rate pressure, Central Bank Governor Arjuna Mahendran said.

"Inflation is remaining low, so that is a good sign," Mahendran said in an interview. "That prima facie would allow further loosening.

"But we have to watch the currency also. The currency has been under pressure for a while. Obviously when you cut rates that is another aspect you have to look at.

"For a small exporting nation like ours, we have to balance that against the need for domestic rates to go down in line with inflation. So that’s really the challenge for us."

Sri Lanka’s inflation rose only 0.1 percent in the 12-months to April, helped by weak credit growth, a stronger dollar that kept global commodity prices low.

But in the first quarter of 2015 a series of state induced fuel and food price cuts were made, which would reduce taxes and push up credit pressure.

In the month of March alone non-foods rose 1.9 percent, and in April 1.4 percent.

Rate decisions will be driven by data which will be ‘microspically’ looked at for appropriate rate decisions, Mahendran said.

"But credit is growing nicely, the supply side is improving with better rainfall so that should also help keep prices under control," Mahendran said.

As there was no international sovereign bond being sold in the first quarter, total government credit was below that of last year, he said.

Mahendran said he did not see any additional pressure on the exchange rate from a greater reliance on domestic credit by the state.

"No. The point is whether it is international or domestic, is the currency of course will be helped by higher remittances," he said.

"Remittances are growing and also we have the swap facility from India."

The Reserve Bank of India has a given a 1.5 billion US dollar swap facility to Sri Lanka of which 400 million US dollars was available for immediate draw down.

"That is a cheaper way of addressing the foreign exchange issue than going for an international sovereign bond," he said.

"We are on a fairly even keel I have no issues either in terms of the currency or lending rates."

The Central Bank was also cautious not to create inflationary expectations.

"Remember you have a 40 percent increase in government salaries. That itself will stoke inflation as we go head. We have to be cautions that expectations do not start mis-behaving.

So we have our own inflationary indicator now that will also guide us in terms of rates.

Update II