Sri Lanka sees no need to adjust policy rates - cbank governor

Last Updated: Mon, Oct 22, 2012 11:30 hrs

* Economy could grow more than 7.5 pct in 2013

* Cbank says rupee could settle at 125 in future

By Shihar Aneez

COLOMBO, Oct 22 (Reuters) - Sri Lanka's central bank sees no need to change its policy rates in the near future and it has reduced credit growth to the desired level, Governor Ajith Nivard Cabraal said.

"Our overall policies are working in the way we had projected and wanted it to work," Cabraal told Reuters on Monday. "So I think there is no need for us to make any further adjustments in the near future."

Cabraal was speaking ahead of the Monetary Board's October meeting, on Monday, to set policy rates. The bank will announce its monetary policy stance at 0200 GMT Tuesday.

Sri Lanka raised rates twice in the first four months of the year to nearly three-year highs and imposed tough credit controls and a flexible exchange rate to deal with trade and balance-of-payments deficits from 2011.

In February, the central bank limited credit growth to a maximum of 23 percent in 2012 from 35 percent last year. In 2011, the policy of a defended rupee and lower interest rates fueled cheap credit and a huge import bill, resulting in a record trade gap.

"Credit growth has come down to the level that we had wanted. Our view is it will be resting in that exact spot we had projected," Cabraal said without giving data on recent credit growth.

Cabraal also said the central bank, which is concerned about future inflationary pressures does not need to cut policy rates at the moment.

Keeping the rate unchanged "seems to be appropriate," he said adding that the central bank is looking at 8-8.5 percent annual inflation by end-2012.

The island nation's economic growth is projected to slow to 6.8 percent from last year's record 8.3 percent due to tough policy measures and conditions in Europe, Sri Lanka's top export destination.

Early this year, the central bank had estimated 8.5 percent growth in 2013, but Cabraal said this is too ambitious.

"The global conditions are such that it would be somewhat tough to pitch for a growth of that nature. But certainly above 7.5 percent is something that we could safely work towards," Cabraal said.

He also predicted that the rupee, which has fallen 14.8 percent since a 3 percent devaluation last November, will appreciate and settle around 125 per U.S. dollar as expected earlier due to expected inflows. On Monday, it was trading around 129.75 to the U.S. dollar.

"We are seeing some fresh inflows due to come in to the stock market, property market, and FDI (foreign direct investment)," he said without elaborating on the numbers.

The governor said he believes it is "pretty realistic" to think that the rupee could settle around 125 to the dollar. (Editing by Richard Borsuk)

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