SRI Lanka’s central bank held interest rates steady on Tuesday (May 28) to ensure inflation pressures remain in check as authorities look to foster economic stability and lift growth following the South Asian nation’s worst financial crisis in decades.
The Central Bank of Sri Lanka (CBSL) kept the Standing Deposit Facility Rate at 8.5 per cent and the Standing Lending Facility Rate at 9.5 per cent, it said.
The decision surprised some in the market as eight out of 15 economists and analysts polled by Reuters had projected rates to be cut by 50 basis points (bps).
Sri Lanka’s key annual inflation rate was at 1.5 per cent in April, down from 6.4 per cent at the start of the year, and prices appear well anchored, the central bank said.
“Incoming data suggests that headline inflation is likely to be below the targeted level of 5 per cent in the upcoming months due to the combined impact of the administered price adjustments and eased food prices, although some upside risks remain,” the central bank said.
CBSL reduced rates by 50 bps in March as it continued an easing cycle that has seen rates drop by 700 bps since June, partially reversing the 1,050 bps in increases made since April 2022 when the economy plunged into crisis.
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Space remains for market lending interest rates to decline further given the prevailing accommodative monetary policy stance, the CBSL said, reiterating to lenders the need to pass on the benefits of lower rates to borrowers without further delay.
“The weighted average lending rate need to adjust more. That is what will assist people to borrow. Its clear the central bank wants private sector credit to expand to boost growth,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group.
Sri Lanka’s economy is expected to grow 3 per cent in 2024 after Colombo secured a US$2.9 billion lending programme from the International Monetary Fund (IMF) last March.
The island’s economy shrank 7.3 per cent in 2022 and 2.3 per cent last year after a record shortfall of US dollar reserves and huge debt sparked a severe financial crisis.
Sri Lanka now faces a June deadline for a deal with its bilateral creditors and to secure an agreement with bondholders to renegotiate its foreign debt and release a third tranche of US$337 million from the IMF. REUTERS
