Sri Lanka keeps interest rates unchanged as economy rebounds

(Bloomberg) — Sri Lanka's central bank kept its benchmark rate unchanged for the first time in five months as the economy gradually recovered and inflation began to pick up.

The Central Bank of Sri Lanka has left the lending facility rate unchanged at 10%, in line with most forecasts of economists surveyed by Bloomberg. The bank cut the rate four times in 2023 by a total of 650 basis points. The deposit rate was also 9%.

„The board took this decision following a comprehensive assessment of domestic and international economic developments to help maintain inflation at the 5% target level over the medium term while enabling the economy to achieve its potential,” the bank said in a statement. .

Sri Lanka's economy expanded for the first time in almost two years in the July-September quarter, gradually recovering from an unprecedented crisis and historic debt default in 2022. Its debt restructuring process.

„The Board is of the view that there is room for continued downward adjustment in market interest rates in line with past monetary policy easing measures and declining risk premia attached to government bonds,” the central bank said.

Inflation has fallen sharply from a peak of 70% last year, although inflation has picked up in recent months, reaching 4% in December. Tax and food price hikes are likely to push up inflation further in January.

Here's what Bloomberg Economics says

The Central Bank of Sri Lanka's interest rate period will be brief, but Tuesday's pause makes sense for now. Demand is very weak and the economy needs more support. We expect the central bank to cut its two key rates by another 100 basis points in the second quarter.

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– Ankur Shukla, Economist

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The recent acceleration in inflation is expected to be short-lived, and the spillover effects of one-time adjustments may be muted due to subdued underlying demand conditions, the central bank said on Tuesday. In the medium term, inflation is expected to remain gradually stable around the 5% target level, „supported by appropriate policy measures”.

The central bank had previously signaled a pause in monetary policy, although Governor Nandalal Weerasinghe earlier this month said the stance would be appropriate for the economy to achieve its potential growth.

–With assistance from Tomoko Sato, Ashanta Sirimanne and Shweta Sunil.

(Updates with Central Bank's comment in third column)

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