May 28 2024: The Central Bank of Sri Lanka (CBSL) opted to maintain interest rates unchanged on Tuesday, aiming to mitigate inflationary pressures and bolster economic stability amid the country’s significant financial challenges.
CBSL announced that the Standing Deposit Facility Rate and the Standing Lending Facility Rate would remain at 8.50% and 9.50%, respectively.
This decision came as a surprise to some market observers, as a Reuters poll had indicated expectations of a 50 basis points rate cut by eight out of 15 economists and analysts.
Sri Lanka’s annual inflation rate stood at 1.5% in April, down from 6.4% earlier in the year, and the central bank noted that prices seem to be well anchored.
“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 stated.
CBSL had reduced rates by 50 bps in March as part of an easing cycle, totaling 700 bps since June. This move partially reversed the 1,050 bps increase since April 2022, when Sri Lanka faced a severe economic crisis.
CBSL Chief P. Weerasinghe mentioned that there is room for further reduction in market lending interest rates, given the accommodative monetary policy stance. He emphasized the importance of lenders passing on the benefits of lower rates to borrowers promptly to stimulate private sector credit growth and overall economic expansion.
Economists highlight that private sector credit growth is vital for economic recovery and suggest that adjustments in lending rates are necessary to facilitate borrowing.
Sri Lanka’s economy is projected to grow by 3% in 2024, supported by a $2.9 billion lending program from the International Monetary Fund secured last March.
Negotiations with bilateral creditors and bondholders are ongoing, aiming to finalize agreements on foreign debt renegotiation and secure additional funds from the IMF by June. CBSL Governor Weerasinghe expressed optimism about completing these negotiations by the deadline.
