August 30, 2016 / 1:30 PM / 3 years ago

UPDATE 1-Sri Lanka central bank keeps rates steady as expected

* Sri Lanka keeps SDFR and SLFR unchanged

* Past tightening measures gradually being transmitted -

* Private sector credit growth still highest in four years

* Upward inflation trend appears to have continued - (Adds detail, quotes throughout)

By Shihar Aneez and Ranga Sirilal

COLOMBO, Aug 30 (Reuters) - Sri Lanka’s central bank held its key policy interest rates steady on Tuesday, as expected, saying previous tightening measures are being gradually transmitted to the economy.

The Central Bank of Sri Lanka, which rates by 50 basis points last month, this time left the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) at 7.00 percent and 8.50 percent, respectively. The bank has tightened policy three times since December.

The central bank had raised both rates by 100 basis points since February, having increased the statutory reserve ratio (SRR) by 150 basis points on Dec. 30.

“The Monetary Board...observed that the impact of the policy measures adopted during the first seven months of the being transmitted to the economy gradually,” the central bank said in a statement.

It also said growth in monetary and credit aggregates is likely to decelerate to a level supportive of maintaining mid-single digit inflation in coming months.

Twelve out of 13 economists had expected the central bank to leave policy settings unchanged.

Its third tightening move since December last month followed stubbornly high private sector credit growth and relatively strong inflationary pressures.

However, private sector credit growth hit a four-year high of 28.2 percent in June, compared to 28 percent a month ago, which the central bank attributed to “a high intake of credit to the industry and services sectors together with a substantial growth in personal loans and advances”.

“It will not come down overnight. It will take some time to come down. If credit growth continues to grow then the regulator might consider jacking up rates again,” said Danushka Samarasinghe, research head at Softlogic Stockbrokers.

“With the central bank mopping up dollar liquidity in the market and pumping rupees, (this) will also help credit growth. It will take much longer for credit growth to decline.”

The bank further said foreign investments in government securities as well as worker remittances and earnings from tourism had eased pressure on the balance of payments and the rupee exchange rate.

July consumer prices slowed to 5.5 percent, down from a 32-month high in June of 6 percent, after the government raised the value added tax (VAT) to tackle a soaring deficit.

The central bank has said Sri Lanka’s economy can still grow at 5 percent or slightly faster this year even after interest rates were increased to dampen scorching credit growth and inflation worries.

The IMF has urged Sri Lanka to reduce its fiscal deficit, raise government revenue and improve its foreign exchange reserves, which stood at $6.5 billion as of the end of July, down more than a third from October 2014. (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Jacqueline Wong/Mark Heinrich)

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