Sri Lanka’s c. bank keeps interest rates unchanged

Sri Lanka’s central bank left interest rates unchanged on Tuesday, prioritising inflation control as the nation navigates towards economic recovery following its recent financial crisis, Reuters reported on Tuesday.

The Central Bank of Sri Lanka (CBSL) maintained the Standing Deposit Facility Rate (SDFR) at 8.50 per cent and the Standing Lending Facility Rate (SLFR) at 9.50 per cent.

This decision surprised some analysts, as eight out of 15 surveyed by Reuters expected a 50-basis point cut.

Sri Lanka’s annual inflation rate has fallen significantly, standing at 1.5 per cent in April compared to 6.4 per cent at the year’s beginning.

The central bank remains confident about price stability, attributing the decline to both government-controlled price adjustments and lower food costs.

However, the bank acknowledges some “upside risks” to inflation. While it anticipates inflation remaining below the five per cent target in the coming months, the CBSL emphasises the need for vigilance.

This decision marks a continuation of the bank’s easing cycle, which began in June 2023. Rates have been reduced by a total of 700 basis points, partially reversing the sharp increases implemented during the 2022 economic crisis.

The central bank highlighted the potential for further declines in market lending rates due to the accommodative monetary policy stance.  It urged lenders to swiftly pass on these benefits to borrowers to stimulate private sector credit and economic growth.

Sri Lanka’s economy is projected to expand by three per cent in 2024, bolstered by a $2.9 billion loan programme secured from the International Monetary Fund (IMF) last March.

This comes after the nation’s economy contracted by 7.3 per cent in 2022 and 2.3 per cent in 2023 due to a severe financial crisis triggered by a lack of foreign reserves and mounting debt.