March 5, 2020 / 7:11 AM / a month ago

UPDATE 1-Sri Lanka leaves rates unchanged, but highlights coronavirus risks

(Updates with details, background)

By Swati Bhat

MUMBAI, March 5 (Reuters) - Sri Lanka’s central bank left its key interest rates unchanged on Thursday following an unexpected pick-up in retail inflation but maintained its accommodative stance, highlighting the risks from the coronavirus epidemic.

The Central Bank of Sri Lanka (CBSL) said it was ready to inject liquidity as necessary, after maintaining the standing deposit facility rate and the standing lending facility rate at 6.50% and 7.50%, respectively. The statutory reserve ratio was also left unchanged at 5%.

The CBSL has cut interest rates thrice over the last 10 months, starting with the first reduction in May after the Easter bomb attacks that triggered a slump in investments and tourism.

The coronavirus epidemic and its potential to become a pandemic pose significant risks to a global economic recovery and would thus impact Sri Lanka, it said.

“The exact impact on the Sri Lankan economy would depend on the extent of the global spread of the COVID-19 outbreak, its persistence and policy responses of major economies and trading partners,” it said.

The virus, which first emerged in the central Chinese city of Wuhan late last year, has spread around the world, with more new cases now appearing outside China than within it.

Sri Lanka has reported only one case so far, but its economic growth could come under pressure as the island nation imports a large number of consumer goods, intermediate goods and investment goods from China.

The outbreak would have spillover effects on tourism, a key source of foreign currency, and its spread to countries with significant numbers of Sri Lankan workers could hit remittances, the CBSL said.

The central bank appeared worried about the virus impact amid uncertainties related to the April elections and the budget’s delayed presentation, said Trisha Peries, head of economic research at Frontier Research.

The local economy is expected to “somewhat recover” in 2020 from the current subpar performance, the CBSL said, stressing on the need for appropriate structural reforms to foster high growth given the limited policy space available.

Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price index, accelerated to 6.2% last month from 5.7% in January but the CBSL expects it to decline in the near term and stabilise within the desired range of 4%-6%.

“They have not sounded as worried as some global central banks have in adjusting policy rates in the past week, and may take a more cautious approach in any further easing measures,” Peries said. (Reporting by Swati Bhat; Editing by Subhranshu Sahu)

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