COLOMBO - Sri Lanka's central bank left its key interest rates unchanged on Monday, but said it could cut rates in future to boost an economy struggling in the wake of a political crisis and sluggish private sector credit growth.
The economy took a battering in the fourth quarter, with annual growth slowing to a 17-year low in 2018 as a weeks-long political crisis and past policy tightenings sapped business confidence and cooled investment.
The rupee, which fell to a record low in early January, has strengthened by more than 4.5 percent since then, giving policymakers some room to address growth concerns.
The central bank said in a statement that rates could be reduced in future, given inflation expectations, and if current trends continued in global financial markets and in Sri Lanka's trade balance and credit growth.
"The central bank has given a clear guidance on what could happen going ahead," Central Bank Governor Indrajit Coomaraswamy told reporters in Colombo after the rates decision.
He said sluggish private sector credit growth and high margins between the benchmark rate and deposit/lending rates have been a cause of concern. Private sector credit growth in February slowed to a multi-year low of 13.6 percent on the year, down from 14.8 percent a month ago, official data showed.
Ten out of 13 economists predicted rates would be kept steady in a Reuters poll.
The central bank said it expected economic growth to be encouraged by structural reforms rather than lower rates.
The rates decision comes after an unexpected move in February to cut banks' Statutory Reserve Ratio (RRR) by 100 basis points to spur credit growth after a political crisis triggered credit downgrades by all three major global rating agencies.
That followed a move to raise the Standing Deposit Facility Rate (SDFR) by 75 bps and the Standing Lending Facility Rate (SLFR) by 50 bps in November, which was also accompanied by a reduction in the SRR by 150 bps to 6.00 percent.
Government finances remain shaky, and Sri Lanka has a heavy external debt repayment schedule between 2019 and 2022.
The International Monetary Fund (IMF) reached an agreement with Sri Lanka last month to extend a $1.5 billion loan facility for an extra year. Prime Minister Ranil Wickremesinghe's government has boosted spending in its 2019 budget to support the economy and woo voters before two key elections.
"The central bank sounded a dovish tone with its statement, hinting at a possible rate cut in its upcoming reviews fuelled by low inflation and easing private sector credit growth," said Trisha Peries, product head of economic research at Frontier Research.
"It also appears to expect more structural reforms to be carried out to encourage economic growth rather than purely a lower rates driven growth," she said.
President Maithripala Sirisena's abrupt change of prime minister in October and his decision to dissolve parliament created panic among investors. The move was later ruled unconstitutional and Wickremesinghe was reinstated.
A presidential vote is expected later this year followed by a general election in 2020.