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Sri Lanka's central bank kept its benchmark interest rate at a 5 1/2-year high in a bid to cool inflation without jeopardizing economic growth.

The Central Bank of Sri Lanka maintained its repurchase rate at 10.5 percent for a 12th straight meeting, the Colombo- based bank said in a statement today. All 12 analysts surveyed by Bloomberg News predicted the decision.

Central Bank Governor Nivard Cabraal is trying to revive the island's $27 billion economy, after growth slowed to an estimated 6.7 percent in 2007 from 7.4 percent in 2006 amid escalating fighting between government forces and Tamil rebels. Interest rates are “sufficient'' to control inflation, which will begin to slow in the second half of this year, Cabraal said in a Feb. 4 interview.

“The central bank's priority is to maintain economic growth,'' said Danushka Samarasinghe, research manager at Asia Securities Co. in Colombo. “Higher interest rates may also have limited impact on inflation'' as consumer price gains are being driven by higher oil and food costs.

The central bank in November forecast the economy to grow between 7 percent and 7.5 percent this year, the fastest pace in three decades, as the government spends money to rebuild the eastern region captured from the Liberation Tiger of Tamil Eelam rebels in July.

Fighting has intensified after the government ended a 2002 cease-fire with the rebels on Jan. 16.

The South Asian nation needs to rein in inflation to achieve 7 percent economic growth this year, Cabraal said Jan 2.

U.S. Slowdown

Manufacturers across Asia are facing slower demand for their products amid signs the U.S., the region's largest export market, is heading for a recession. Higher prices are preventing central banks in the region from following the U.S. Federal Reserve in reducing borrowing costs.

Standard & Poor's last week lowered its outlook on Sri Lanka's credit rating to “negative,'' citing weakening state finances and fallout from the end of the truce http://payday-nofax.com. A negative outlook increases the country's chances of a rating downgrade.

“Given that inflation risks remain squarely biased to the upside we think that policy should be tightened and are penciling in 75 basis points worth of hikes during the course of the year,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. “However the increasing uncertainty regarding the U.S. outlook could make the central bank less aggressive in hiking.''

Credit Growth

The yield on the note due March 2009 with a coupon of 7.5 percent was little changed at 18.5 percent at 9:05 a.m. in Colombo, according to First Capital Treasuries Ltd. The rupee was holding at 107.85 to the dollar. A basis point is 0.01 percentage point.

The central bank is keeping monetary policy tight with its daily open-market operations to adjust the amount of cash in the banking system and controlling credit demand.

Credit growth in Sri Lanka's private sector, including consumers, slowed to 19.3 percent in December, compared with 24 percent a year earlier, according to the central bank.

The central bank said credit to state companies is expected “to improve'' this year.

Higher oil prices are one of the “main risks and difficulties we are facing,'' Cabraal said on Feb. 4.

State-owned Ceylon Petroleum Corp. and Lanka IOC Ltd., the Sri Lankan unit of Indian Oil Corp., raised fuel prices on Jan. 13 for the first time in almost six months to cut losses caused by record oil costs.

“Inflation is expected to moderate to lower levels during the second half of the year with the further containment of demand pressures as well as the phasing out of the one-off impact of the removal of fuel subsidies,'' the central bank said in today's statement.

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