The Central Bank of Sri Lanka, which has tightened monetary policy three times since last December, left the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) at 7 percent and 8.5 percent, respectively. Tighter credit conditions have already weighed on economic growth, which slowed to 4 percent year-on-year in the first nine months of 2016 from 5.7 percent in the same period last year. The central bank has estimated overall 2016 economic growth at around 5 percent, up from last year's 4.8 percent.
"Favourable developments in leading economic indicators as well as the lower base in the fourth quarter of 2015 are likely to steer economic growth upwards in the final quarter of 2016 in spite of the effect of adverse weather conditions and global economic uncertainties," the central bank said in a statement. It has raised both main interest rates by 100 basis points (bps) since February, with the last 50 basis point hike in July, to tame credit growth and inflation and support the rupee.
The currency has fallen around 3.9 percent this year due to dollar demand from importers and foreign investors who have been exiting Sri Lankan government securities. Foreign investors sold a net 55.2 billion rupees ($369.23 million) of government securities in the nine weeks to December 21.
A stronger US dollar has also weighed on emerging market currencies like the rupee. Last month, the International Monetary Fund said Sri Lanka's economic and financial conditions have begun to stabilise and that performance under its $1.5 billion loan programme was satisfactory. Analysts said tight fiscal policies for 2017, announced earlier this month, could give the central bank room to hold off raising interest rates next year. "High absolute credit growth number in October will be a concern for policy, though year-on-year it has come down due to base effects," said Shiran Fernando, an analyst at Colombo-based Frontier Research.