Sri Lanka central bank holds rates to temper inflation

By Uditha Jayasinghe and Swati Bhat

COLOMBO (Reuters) -Sri Lanka’s central bank kept its interest rates unchanged on Tuesday in the face of stubbornly high inflation, in its first policy decision since securing a $3 billion bailout from the International Monetary Fund (IMF).

The Central Bank of Sri Lanka (CBSL) held its standing deposit facility rate and standing lending facility rate at 15.50% and 16.50%, respectively, it said in a statement.

“The maintenance of the prevailing tight monetary policy stance is necessary to ensure that monetary conditions remain sufficiently tight to facilitate the continuation of the ongoing disinflation process,” the CBSL said.

It last raised rates by 100 basis points in early March – its first increase in seven months – as part of efforts to finalise a four-year IMF programme meant to help it emerge from the island’s worst financial crisis in more than seven decades.

The CBSL’s rate decision was largely in line with expectations as it continues to focus on inflation which clocked in at a stubborn 50.3% in March.

Any easing of rates will likely happen around September or October, analysts polled by Reuters said, in line with central bank predictions of inflation falling to single digits at the start of the third quarter.

Headline inflation is projected to reach single digit levels by end 2023 and stabilise at desired levels thereafter over the medium term, CBSL reiterated in its policy statement.

“The subdued aggregate demand on account of tight monetary and fiscal policies and improved domestic supply conditions will ensure the envisaged disinflation process in the period ahead, supported also by anchoring inflation expectations,” the central bank said.

Sri Lanka will also kick off a reworking of part of its domestic debt next month and aims to finalise it by May.

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