July 6, 2018 / 3:03 AM / 15 days ago

UPDATE 2-Sri Lanka c.bank sees 2018 economic growth at 4 pct to 4.5 pct, leaves policy rates unchanged

* Central bank revises down growth estimate

* Cbank unexpectedly cut rates in April

* Rupee under downward pressure amid foreign outflows

* Political uncertainty, tight fiscal policies weigh on growth (Adds cenbank chief comment; paragraphs 4,5)

By Shihar Aneez

COLOMBO, July 6 (Reuters) - Sri Lanka’s central bank left its key policy rates unchanged as expected on Friday, saying a low rates environment and stabilising inflation would support its economy in the face of a fragile rupee currency.

Political uncertainty stoked by the ruling coalition’s loss in local polls in February has cast a shadow over the economy, which slowed to a 16-year low of 3.3 percent in 2017, prompting an unexpected rate cut in April.

Growth is under more pressure as rising U.S. interest rates have seen foreigners pull out funds from emerging markets.

Central Bank governor Indrajit Coomaraswamy said the bank’s projection of 5 percent growth for 2018 was “ambitious” and pulled it closer to a government forecast of 4.5 percent.

“We are in the process of realising that the 5 percent growth is ambitious,” he told reporters after the bank’s policy rate announcement. “It will not be less than 4 percent. It will be between 4 percent and 4.5 percent.”

The central bank said in a statement its monetary board’s decision is “consistent with stabilising inflation at mid-single digit levels in the medium term, thereby contributing to a favourable growth outlook for the Sri Lankan economy.”

“The sustained recovery in the global economy is likely to support domestic economic growth, while the prevalence of a low inflation environment and an appropriately valued flexible exchange rate are also expected to facilitate higher growth.”

The central bank left the standing lending facility rate (SLFR) at 8.50 percent and standing deposit facility rate (SDFR) at 7.25 percent. The market had expected both rates to be kept steady.

The central bank unexpectedly cut its key lending rate by 25 basis points in April to support the economy, but policymakers must also defend a fragile rupee as the Federal Reserve’s rate increases draw funds from emerging markets toward dollar-denominated assets.

“At this moment the central bank can’t do anything,” said Dimantha Mathew, head of research at First Capital Holdings.

“The economy is too slow, so the rates needed to be cut. But the foreign outflow from the government securities is high, so you can’t cut the rates.”

The spot rupee hit an all-time low of 160.17 per dollar on June 20 and is down 3.6 percent so far this year, after falling 2.5 percent last year. Currency dealers expect a fall of around 6 percent this year.

“Much of this depreciation was recorded since late April, reflecting the broad-based strengthening of the US dollar in the international market,” the central bank said, adding that it intervened to tackle speculative behaviour and unwarranted volatility.

Since April 18, Sri Lanka has seen foreign outflows of 28.7 billion rupee ($181.3 million) from government securities, central bank data showed.

The previous rate increases, along with tight fiscal measures to meet conditions imposed by the International Monetary Fund for a $1.5 billion loan, have dragged on the economy. (Editing by Clarence Fernandez)

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