Sri Lanka needs new measures to cut interest rates further - cenbank

COLOMBO, April 8 Tue Apr 8, 2014 8:56am EDT

COLOMBO, April 8 (Reuters) - Sri Lanka may need new measures including higher deposit rates and help for the elderly before reducing interest rates further in a lower inflation environment, the island nation's central bank head said on Tuesday.

The $67 billion economy has already reduced its key monetary policy rates by between 125-175 basis points to multi-year lows between December 2012 and January 2014 to boost credit growth and sluggish growth.

"The reduction in the interest rate has become a challenge," Central Bank Governor Ajith Nivard Cabraal told a gathering for the release of the bank's 2013 annual report.

"Without new strategies for elders who are depending on the interest income to get a higher income, we can't reduce the interest rate to necessary levels despite lower inflation."

Cabraal said the prevailing conditions and the interest rates the central bank was maintaining were "appropriate".

Annual inflation has been in single digits for almost last five years. It was steady at a 25-month low of 4.2 percent year-on-year in March.

The repurchase rate and the reverse repurchase rate are at 6.50 percent and 8.00 percent respectively, both at multi-year lows. Short-term government securities have also been hovering between 6.64-7.05 percent.

However, private sector credit growth has been sluggish despite declining interest rates. In January, it grew 5.2 percent year-on-year, the slowest expansion since May 2010. In December, credit was 7.5 percent higher than a year earlier, and in January 2013, annual expansion was 15.5 percent.

Cabraal said he expected credit growth to pick up towards the second half of the year.

The economy expanded 7.3 percent last year, from a 6.3 percent the previous year. The central bank estimates 7.8 percent growth this year. (Reporting by Shihar Aneez and Ranga Sirilal; Editig by Robert Birsel)

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