Sri Lanka c.bank holds rates as it awaits key IMF deal


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COLOMBO – Sri Lanka’s central bank kept interest rates steady for a third straight meeting on Wednesday, as widely expected, saying the prevailing tight monetary stance was essential to taming still high inflation and restoring economic stability.

The island nation of 22 million people, which is trying to secure a $2.9 billion IMF financing package, is in the grip of its worst economic crisis since independence from Britain in 1948.

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The Standing Lending Facility Rate was held steady at 15.50% while the Standing Deposit Facility Rate was held unchanged at 14.50%, remaining at their highest levels since August 2001.

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“The Board… was of the view that maintaining the prevailing tight monetary policy stance is essential to ensure that monetary conditions remain sufficiently tight to contain inflationary pressures,” the Central Bank of Sri Lanka (CBSL) said in a statement. .

“Market rates are adjusting as expected, so there was no need to touch policy rate,” said Udeeshan Jonas, chief strategist at CAL Group.

The CBSL has hiked rates by a massive 950 basis points between August 2021 and July 2022 to fight runaway inflation. Policymakers continue to grapple with challenges on multiple fronts, including a shortage of foreign exchange, a collapse in the rupee, a sharp recession and slowing global growth.

The central bank said tight monetary and fiscal policy would help bring inflation down to desired levels by the end of 2023 and restore price and economic stability over the medium term.

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After hitting an annual high of 68.9% in September with food inflation climbing to 93.7%, consumer inflation moderated to 57.2% in December.

IMF TRADE CRITICAL

The external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements linked to “funding assurance” from creditors, the CBSL statement said.

Sri Lanka is committed to meeting all its debt repayments and hopes to complete debt restructuring negotiations in the next six months, central bank governor P. Nandalal Weerasinghe said on Tuesday.

India told the IMF last week that it strongly supports Sri Lanka’s debt restructuring plan, a crucial endorsement for Colombo as it seeks to secure the $2.9 billion four-year program from the global lender and shore up its battered finances.

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“It is important that CBSL is clear in their communication on domestic debt restructuring, regardless of the final decision, as it is the major driver of the risk premiums attached to market rates,” says Thilina Panduwawala, head of research at Colombo-based Frontier Research.

MARKET RATES ARE FALLING

Market interest rates have started to fall and are expected to ease further, the central bank said.

Interest rates on three-month government bonds have fallen to around 30% from a high of around 32% earlier this month.

“They may only start looking at policy rate revisions once inflation takes a substantial turn and the IMF deal is through,” says CAL Group’s Jonas. (Editing by Shri Navaratnam)

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