The island nation aims for record 8.5 percent economic growth this year, topping 2010’s 8 percent, which was the highest level in 32 years. Sri Lanka expects annual inflation, which reached 7.5 percent in July, to slow to 6 percent by the end of 2011.
For the seventh straight month, the central bank on Friday left the repurchase and reverse repurchase rates unchanged at 7 percent and 8.5 percent, respectively, their six-year lows.
It also held commercial banks’ Statutory Reserve Ratio (SRR) unchanged, as expected.
“With the continuous improvements in the supply of most food items, inflation is expected to moderate in the coming months,” the central bank said in its monetary policy review statement. 
Due to heavy monsoon rains during the fourth quarter of every year, food production in Sri Lanka is higher then compared with other months.  
The annual inflation rate surprisingly rose in July to 7.5 percent, from 7.1 percent in June, as higher transport costs overwhelmed an improved domestic agricultural supply.
Private sector credit growth hit a 16-year high of 34.4 percent in June year-on-year, though the rapid expansion was partly due to a low base in the previous year. 
“Such increase was higher than originally estimated,” the central bank said. 
Despite that larger-than-expected credit growth, the central bank said its 2011 monetary targets are likely to be met due to easing pressure on aggregate demand, given uncertainties in advanced economies. 
“The central bank will continue to closely monitor the growth of monetary aggregates and will implement appropriate measures if demand-side pressures in the economy increase.” 
The country had an inflow of $431 million from foreign direct investment in the first half. It has a target of keeping the fiscal deficit to 6.8 percent of gross domestic product (GDP). 
Analysts said Friday’s decision to hold rates would help stability. 
“This is a cautionary move to maintain stability,” said Danushka Samarasinghe, head of research at TKS Securities.
“Rather than cutting the rates now and then raising them in three months, keeping them steady gives more stability.” 
The rupee did not move after the expected policy rate announcement.