Sri Lanka’s Central Bank Maintains Interest Rates

By Uditha Jayasinghe
COLOMBO (Reuters) – Sri Lanka’s central bank kept interest rates unchanged on Friday, aligning with expectations amid domestic and global uncertainties. The central bank stated that inflation is likely to remain low, and growth is outperforming earlier projections.

The Central Bank of Sri Lanka (CBSL) maintained the Standing Deposit Facility Rate at 8.25% and the Standing Lending Facility Rate at 9.25%. This decision follows the election of a new president aimed at navigating the country out of its most severe financial crisis in decades.

CBSL reported that inflation is likely to remain well below the target of 5% for the next few quarters, possibly showing deflation in the near term, influenced by changes in administratively set prices and improvements in supply conditions. CBSL had previously cut rates by 25 basis points in July, contributing to a cumulative drop of 7.25 percentage points since June 2023, partly undoing the 10.50 percentage points increases following the financial crisis.

The latest economic indicators suggest robust economic expansion seen in early 2024 is expected to continue, leading to higher full-year growth than initially estimated.

“Growth and credit growth are currently at decent levels. Given premiums have increased on government securities due to political uncertainty, CBSL is keen to see reductions in those premiums first,” stated Udeeshan Jonas, strategy head at CAL, a Colombo-based equity research firm.

Jonas cautioned that inflation in the latter half of the year could rise, though the fiscal easing anticipated from the new president’s upcoming budget might affect prices.

Last Saturday, Sri Lanka elected Anura Kumara Dissanayake, a Marxist-leaning leader, promising to cut taxes, combat corruption, and lower living costs. Dissanayake dissolved parliament on Tuesday in an effort to strengthen his influence before the upcoming general election on November 14. His coalition holds only three seats in the parliament elected in August 2020.

On Wednesday, he announced intentions to commence negotiations with the International Monetary Fund (IMF) to advance the country’s $2.9 billion bailout program, which has contributed to easing inflation, stabilizing the rupee, and rebuilding reserves.

“We are discussing the next steps for engagement,” stated IMF Senior Mission Chief for Sri Lanka, Peter Breuer, in an email, emphasizing that the fund looks forward to collaborating with the new president.