Central Bank holds interest rate steady ahead of budget, IMF review

Sri Lanka
By Editor_1
People walk past the main entrance of the Sri Lanka's Central Bank in Colombo, Sri Lanka March 24, 2017. The Central Bank cut its key interest rates by 50 basis points on Tuesday (March 26, 2024) as inflation eased, signalling nation was emerging from a devastating financial crisis and ready for a rebound in growth -Dinuka Liyanawatte/Reuters/File

By Uditha Jayasinghe

COLOMBO – Sri Lanka’s central bank kept its policy interest rate unchanged on Wednesday (26) as it awaited approval of the country’s budget and the latest loan review from the International Monetary Fund (IMF).

The Central Bank of Sri Lanka (CBSL) held the overnight policy rate at 7.75%, as forecast by all 13 economists in a Reuters poll, who cited stable inflation, healthy credit growth and steady economic expansion.

The monetary authority has kept the rate steady since May as Sri Lanka continues its recovery from a 2022 financial crisis brought about by a collapse in foreign currency reserves.

Sri Lanka’s foreign exchange reserves will reach close to $7 billion, the highest since the crisis, CBSL Governor P. Nandalal Weerasinghe told reporters at a press briefing in Colombo.

“It is important for us to build buffers, monetary and fiscal buffers, to face potential global headwinds next year,” he said.

The central bank projects the economy will grow 4.5% this year, after expanding 5% last year.

It also said inflation is likely to accelerate more gradually than its earlier projection and reach its 5% target by the second half of 2026.

Milder inflation may prompt the central bank to consider a quarter-point rate cut early next year, analysts said.

“Holding the overnight policy rate seems to be driven by current credit growth momentum being sufficient to reach expected growth and inflation targets,” said Anjali Hewapathage, deputy head of macroeconomic research at Frontier Research.

“The question in the next one to two months is going to be what levels of demand are going to be reflected in inflation at similar levels of credit growth, since CBSL expects the momentum to continue.”

The IMF’s executive board is due to approve a $347 million tranche of the global lender’s $2.9 billion loan programme with Sri Lanka next month.

Sri Lanka’s budget, compiled with an emphasis on fiscal consolidation aligned with the IMF program, is set for a final vote from lawmakers on December 5.

-Reuters

Editor_1
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