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UPDATE 1-Sri Lanka raises rates unexpectedly to face macroeconomic risks

* Cenbank raises rates for the first time in almost 4 yrs

* Rate hikes comes as Sri Lanka in initial IMF loan talks

* Private sector credit growth slows in December

* Analysts see ease in rupee, selling pressure on stocks (Adds details, quotes)

By Shihar Aneez and Ranga Sirilal

Feb 19 (Reuters) - Sri Lanka’s central bank unexpectedly raised its key policy interest rates by 50 basis points on Friday from a record low, to prevent demand-driven inflationary pressure.

Rates were raised for the first time almost in four years with the bank increasing the standing deposit facility rate (SDFR) to 6.50 percent and the standing lending facility rate (SLFR) to 8 percent. (bit.ly/1mLXNas)

A Reuters poll had predicted rates to be kept steady. Commercial banks’ statutory reserve ratio was left unchanged at 7.50 percent.

The rate hike comes as Sri Lankan is in initial talks with the IMF about a loan amid concerns over pressures on its balance of payments, outflows from government bonds, a ballooning fiscal deficit and heavy downward pressure on the rupee.

The central bank in a statement said its Monetary Board had observed “certain risks to macroeconomic stability continue”, in spite of the recent policy measures and some upward adjustments observed in market interest rates.

“The Monetary Board was of the view...continued upward trend in underlying inflation requires pre-emptive policy measures in order to contain further build-up of demand driven inflationary pressures,” it said.

CREDIT GROWTH SLOWS

Private sector credit growth by commercial banks grew at 25.1 percent in December, slowing for the first time since August 2014. It slowed from 27 percent in November.

Currency dealers said the policy move will ease the pressure on the rupee, which fell 9 percent last year, while stockbrokers said there will be selling pressure in stocks with investors shifting to fixed assets. Rupee is under pressure due to strong imports and foreign selling of government securities.

“This will give a policy direction that the interest rates are on the way up. So that’s the signal to the market. This will ease the policy uncertainty little bit,” said Shiran Fernando, an analyst at Colombo-based Frontier Research.

Higher foreign debt repayments and the central bank’s heavy intervention to prop up a falling rupee have depleted Sri Lanka’s reserves by around a third to $6.3 billion as of Jan. 31, from a peak in October 2014. ($1 = 143.8600 Sri Lankan rupees) (Additional reporting by Samantha Kareen Nair in Bengaluru; Editing by xxx)

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