(Adds cenbank governor, analyst comments, background)
By Shihar Aneez and Ranga Sirilal
COLOMBO, Oct 17 (Reuters) - Sri Lanka’s central bank kept key policy rates steady at record lows for a ninth straight month on Friday, as expected, saying that private sector credit growth is picking up and that longer term lending rates are adjusting downwards.
The standing deposit facility rate (SDFR) or repurchase rate and standing lending facility rate (SLFR) or reverse repurchase rates were left unchanged at 6.50 percent and 8.00 percent, respectively.
The central bank also continued to restrict access to the SDF for commercial banks, allowing banks to deposit excess money at 6.50 percent only three times in a month and at 5.00 percent thereafter, which the market has seen as an effective rate cut.
Ajith Nivard Cabraal, the central bank governor, said the $67 billion economy is on track to achieve this year’s 7.8 percent growth target and 8 percent next year.
“The indications show inflation will further moderate and growth should also strongly pick up with the number of investments we see,” Cabraal told Reuters.
Private sector credit growth, which hit a more than 4-1/2-year low of 0.8 percent in July year-on-year, picked up for the first time since December 2013, showing a 2.6 percent expansion in August.
“We will allow credit growth to the target and once we reach it, we will carefully monitor the credit growth,” to prevent any bubbles, Cabraal said.
The central bank has estimated 14 percent private sector credit growth for 2014.
The central bank also on Wednesday raised the yield by 11 basis points at a 364-day treasury bill auction for the first time in 10 months, which Cabraal later said was a signal where the authorities want rates to be. The yield rose to 6.00 percent.
Cabraal said it is very likely that the yields will be in the range of around 6 percent.
Sri Lanka’s point-to-point inflation remained steady at 3.5 percent in September and the central bank expects it to be in the range of 3-4 percent by end 2014.
The rise in the yield came after foreign investors started sell government securities due to lower rates. Foreigners have sold a net 26.2 billion rupees ($200.46 million) worth securities in the three weeks through Oct. 7.
Shiran Fernando, an economist at Colombo-based Frontier Research said market interest rates will be under upward pressure if foreigners continue to sell bonds from emerging and frontier markets including Sri Lanka in the wake of rising U.S. treasury yields.
“That would pose a threat to the central bank’s current policy stance,” he said.
Between December 2012 and January 2014, the central bank cut the repurchase rate by 125 basis points (bps) and the reverse repurchase rate by 175 bps to stimulate growth.
However, growth of credit extended to the private sector had been sluggish, which some banks and economists attributed to higher taxes and lower disposable income.
Analysts have said a lack of transparency in government contracts had also dampened business sentiment.
The government reduced fuel prices since Sept. 15 and has signaled a further possible reduction in the 2015 budget scheduled for Oct. 24.
However, analysts say the price reductions can be reversed after a possible early national election, in which President Mahinda Rajapaksa expects to run for his third six-year term. (1 US dollar = 130.7000 Sri Lankan rupee) (Editing by Kim Coghill)