Sri Lanka wants to maintain rates at current levels: CB Governor

[sashimaalTop contributor]

Feb 25, 2016 (LBO) – Sri Lanka’s central bank governor hopes interest rates can be maintained at current levels, after a 50 basis point rate hike last week, but this will be determined by external factors, he said.

The island’s policy rates are at 6.5 percent and 8 percent, while 10-year treasury bond yields have increased to 11.75 percent.

“We will certainly try our best to keep interest rates at this level, and not let them escalate much further, but it is to a large extent determined by international trends,” Governor Arjuna Mahendran said, speaking to media on the state of the economy.

Emerging markets continue to experience foreign selling, according to him. First it was in anticipation of a US rate hike. Now its Middle Eastern sovereign funds liquidating positions to cover low oil revenues.

“If this selling continues for many more months to come, then we will have to consider further rate hikes ahead. So I won’t rule it out.”

The 50 basis point rate hike also took capital flows into account.

“This is a factor we have looked at in order to induce investors to keep their money in Sri Lanka. We have to offer higher returns. Raising interest rates ensures the currency stabilizes,” he added.

Last week’s rate hike was equally spurred by growth in bank lending running at 25 percent. Once growth runs beyond 15 percent, he is bound by law to write to the finance minister with an explanation.

“We had to resort to this unfortuate interest rate hike last week. The basic issue is that growth of bank lending is running at about 25 percent.”

“It is a good thing, and a sign of confidence, when banks are willing to lend and people are willing to borrow. But you don’t want it to get out of control. We don’t want a credit bubble that creates more problems than it solves.”

Sri Lanka’s economic growth is running above 5 percent and Mahendran suggested that economic growth would continue to be a priority. Monetary policy, in that sense, would support this.

[RapaportTop contributor]

This is the same man who said interest rates are at decent levels and need not be changed - just a few months ago..

With the current 50bps rate hike, which was more or less expected next month rather than this month, it shows that CBSL is desperate to avoid a downgrade and badly wants to please IMF..... Wonder why...

With the 50bps rate hike, we are back to early 2015 levels rates which were low enough to generate significant credit growth. However the bank rates will probably move up a bit more than early 2015 levels. We need to see next few months for credit growth post rate hike. Avurudu season around the corner does not augur well for subdued credit growth next few months.

I feel another 50-100 bps may be required next 6-12 months.

And what is he talking about global reasons to increase rates?? What about the irrational salary hike and money printing???

Short sighted spending which is not reversible like a salary hike will need to be adjusted via rate hike/inflation/rupee devaluation! Trying to avoid this and worsening the situation further by burning reserves and firing credit bubbles with printed money does not obviously help. CBSL is one central bank with can write a book about decades of this similar experience. During previous balance of payment crisis such as the 2012 crisis, it could be reversed by increasing fuel prices to an extent! We cant cut salaries but can make the salary hike worthless via inflation and rupee davaluation..

If one is wondering CSE is trading at very low valuations, Bloomberg PE ratio's are as follows:
ASPI 13.44X
Shanghai 14.46X
Hang Seng (Hong Kong) 8.5X
Sensex 17.68X
Malaysia 17.22X
Singapore 11.12X
South Korea 14.53X
Taiwan 13.65X
Thai 14.53X
Vietnam 11.93X
Karachi 10.30 X

If we compare globally and for us to be attractive to compete with other regional markets, we need to shed a bit more... This is solely my opinion and please do your own research. I am not trying to manipulate but just educating the ones who want to learn...

Cheers!

[yellow knifeTop contributor]

Credibility is what we expect from Leaders..Policy makers...

Thanx Shashimal and Rapa for for your contribution and views..

[First Guy]

Rapa - do you have a comparison of PEG for these countries?

[RapaportTop contributor]

Nope sorry