COLOMBO: Sri Lanka’s central bank is likely to keep interest rates steady on Thursday (Aug 18) on hopes a recent downtrend in global commodity prices will be sustained and help steady record high domestic inflation without any further monetary tightening.
Eleven out of 15 economists and analysts polled by Reuters said they expect rates to remain unchanged as the Central Bank of Sri Lanka (CBSL) waits for the effects of its earlier hikes to filter through into the economy and for inflation to stabilise.
“There is no need for a change. On multiple fronts things are looking better,” said Udeeshan Jonas, chief strategist at CAL Group. “Inflation is changing course, economic activity is better and currency pressure is easing off.”
Inflation in Sri Lanka hit 60.8 per cent year on year in July and food costs expanded by a searing 90.9 per cent, according to government data.
Among other issues, a steep increase in crude prices turbo-charged the country’s worst financial crisis in seven decades as the island of 22 million people was caught in a severe dollar shortage that has left it struggling to pay for essential imports including fuel, food and medicine.
The CBSL has raised rates by a record 950 basis points so far this year to battle high inflation which was adding to the country’s economic worries.
The standing deposit facility rate and standing lending facility rate stand at 14.50 per cent and 15.50 per cent, respectively.
Economists said the CBSL will also wait to get a sense of the government’s fiscal targets when it presents an interim budget to parliament in the first week of September, following the departure of former president Gotabaya Rajapaksa last month amid mass protests.
Sri Lanka is in talks with the International Monetary Fund (IMF) for a possible US$3 billion bailout package but has to present a plan to put its unwieldy debt on a sustainable path to secure a four-year programme.
“The main concerns now will be the debt restructuring needed for an IMF program and targets that will be set in the interim budget,” CAL Group’s Jonas said.