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Financials

UPDATE 1-Sri Lanka central bank keeps policy rates steady at record lows

(Adds detail, cenbank governor, analyst quotes)

COLOMBO, Jan 27 (Reuters) - Sri Lanka’s central bank kept key policy rates steady at record lows for a 12th straight month on Tuesday, as expected, and said inflation was expected to ease further with the economy expected “to record a robust performance” in the period ahead.

It left the standing deposit facility rate and the standing lending facility rate unchanged at 6.50 percent and 8.00 percent, respectively. The commercial banks’ statutory reserve ratio was unchanged at 6.00 percent.

The central bank also kept on a penalty repo rate of 5 percent that it pays to banks that use the standing deposit facility more than three times a month, to boost credit growth by reducing the banks’ deposits into the central bank.

Private sector credit growth was 6.5 percent in November year-on-year, compared to 5.1 percent a month ago.

“Private sector credit growth is picking up,” the new Central Bank Governor, Arjuna Mahendran, told Reuters after his first monetary policy meeting.

“We’ll watch government’s budget and then decide whether we want to continue with this policy or make any adjustments. But for now I think the economy is doing fairly well and credit growth, which was very weak last year, has started recovering. That’s a good sign.”

Mahendran said the downward pressure on the rupee currency will ease after the government’s budget announcement.

Finance Minister Ravi Karunanayake will present a supplementary budget on Thursday aiming to fulfill election pledges by President Maithripala Sirisena, including pay hikes for the state sector and price reductions on essential goods.

The central bank said inflation would ease further on the fall in fuel prices and an expected reduction in the administered prices of other key commodities in the budget.

The market had expected the central bank to scrap the lower repo rate, and revise some economic indicators.

Karunanayake on Monday told Reuters that Sirisena’s new government has inherited a “scary” economic situation with the $76 billion economy “in a precarious position” as a large amount of debt had not been recorded on the government books.

“Going forward it will be interesting if there is going to be a divergence of views between the government and the central bank on macroeconomic performance and numbers,” said Amal Sanderatne, CEO of Frontier Research in Colombo.

Sanderatne added that increasing pressure on the balance of payments after the central bank defended the rupee might require policy tightening policy measures in the near future.

The central bank predicted the economy would expand at 8 percent this year from an estimated 7.8 percent growth in 2014. (Reporting by Shihar Aneez and Ranga Sirilal; Editing by ERic Meijer)

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