March 10, 2014 / 6:56 AM / 4 years ago

UPDATE 1-Sri Lanka rates to hold steady, no easing seen in next 2-3 months - Treasury sec

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By Shihar Aneez

COLOMBO, March 10 (Reuters) - Sri Lanka’s benchmark interest rates will remain steady for the next 2-3 months, Treasury Secretary P.B. Jayasundera said on Monday, downplaying expectations of further near term monetary easing despite weak private sector credit growth.

The central bank has maintained an easing bias on monetary policy since December 2012 as it sought to bolster growth and boost demand. It cut both the repurchase rate and the reverse repurchase rate by 125 basis points (bps) each in the 11 months between December 2012 and October 2013.

In January, the central bank reduced reverse repurchase rate by a further 50 bps. Both key rates are at multi-year lows.

However, banks have repeatedly said that private sector credit growth is sluggish despite the loose monetary conditions. Private sector credit growth edged up to 7.5 percent in December from 7.3 percent in the previous month, but was still well below the 35 percent growth rate of 2011.

“No adjustment will take place in the next 2-3 months,” Jayasundera told Reuters when asked if the monetary authorities are considering any further downward adjustments to the interest rates to boost faltering credit and economic growth.

“Let the banks develop good customers and loan portfolio. It takes time,” said Jayasundera, the top technocrat in President Mahinda Rajapaksa’s government.

The $67 billion economy is targeting 7.8 percent economic growth this year, picking up from the last year’s estimated growth of 7.2 percent with inflation expected in the 4-6 percent range by end of this year.

The central bank’s rate cuts since December 2012 have failed to sufficiently spur private sector credit growth, with the economy largely motoring on major state-led infrastructure projects.

Danushka Samarasinghe, the head of TKS Securities research said large urban middle class isn’t taking advantage of the low interest rate environment because of “concerns of their disposable income level.”

Economists have said that Sri Lanka’s inconsistent investment and economic policies in the past have hit investor sentiment, hindering foreign direct investments despite an end to a 26-year civil war in 2009.

Higher taxes on essential goods have also reduced consumers’ spending power, further hurting credit growth. (Reporting by Shihar Aneez; Editing by Shri Navaratnam)

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