Sri Lanka central bank seen holding rates to foster stability

Sri Lanka
By Editor_1
By Uditha Jayasinghe

COLOMBO – Sri Lanka’s central bank is expected to hold interest rates for a second straight meeting on Wednesday (24) as it attempts to maintain monetary stability in the shadow of a dragging financial crisis and counter-simmering political tensions.

Nine out of 14 economists and analysts polled by Reuters expect the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) to be unchanged at 8.50% and 9.50%, respectively.

The Central Bank of Sri Lanka (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 since April 2022.

Sri Lanka’s key inflation rate dropped to 1.7% in June and is likely to remain under the CBSL’s target of 5% for the year, analysts said.

But persistent political concerns around how Sri Lanka’s upcoming presidential election – which is expected to be announced later this month – will play out is weighing on the economy, they added. The election is expected to be held in late September or early October.

“There is no real requirement to push down rates, in fact given the election uncertainty putting down rates is a risk,” said Dimantha Mathew, head of research at First Capital Holdings.

“Rates are at the appropriate level now.”

Sri Lanka cut power tariffs by 22.5% last week and reduced fuel prices, two policy measures taken to align with a $2.9 billion International Monetary Fund (IMF) bailout that has helped the island nation rebuild its foreign exchange reserves, temper inflation and strengthen its currency.

A gradual recovery in consumption and private sector credit growth coupled with lower power and fuel costs will also nudge growth, negating the need for an interest rate reduction, analysts added.

CBSL expects Sri Lanka to grow by 3% this year – two years after the economy shrank 7.3% due to a severe dollar shortage.

-Reuters

Editor_1
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