Boston, MA -- (ReleaseWire) -- 01/01/2013 -- BMI View: Since we last cautioned that the central bank's hawkish turn would spell 'double trouble' the country's banking sector, given the added backdrop of a slowing economy, the Central Bank of Sri Lanka (CBSL) has only become more aggressive with its approach to curb loan growth. With private sector credit growth appearing to pick up pace once more, the CBSL could be forced to go over and above simple interest rates measures, possibly initiating much more direct reserve ratio hikes. Since we last warned that the Central Bank of Sri Lanka (CBSL)'s hawkish turn on interest rates would be 'double trouble' for the country's commercial banking sector, given the backdrop of an economy that we expect to sharply slow (see 'CBSL's Hawkish Turn Suggests Double Trouble For Banks', February 29), the central bank has only become more aggressive with its tightening. Indeed, the central bank hiked its benchmark reverse repo rate by 75 basis points (bps) last month. With headline inflationary risks having recently entered the picture, our core view for a further 100bps worth of further interest rate hikes from the CBSL has gained traction (see 'Rising Inflationary Risks Support Hawkish Rate View', May 8). The additional rise in interest rates should considerably impinge on the demand for loans, and, in turn, the banking sector's asset growth. As a result, we expect the proportion of bonds to total assets (which was 17.3% in October 2011) to markedly increase.
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