Sri Lanka's central bank holds interest rates steady for third straight meeting

COLOMBO Sri Lanka's central bank held interest rates steady for a third straight meeting on Wednesday, as widely expected, saying that the prevailing tight monetary stance is crucial to taming still-high inflation and restoring economic stability.

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

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

The Central Bank of Sri Lanka CBSL said in a statement that the Board was of the opinion that the need to maintain the prevailing tight monetary policy position is essential to ensure that monetary conditions remain sufficiently tight to combat inflationary pressures.

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

The CBSL had increased rates by 950 basis points between August 2021 and July 2022 to fight runaway inflation. There are still challenges on a number of fronts including a shortage of foreign currency, a collapse of the rupee, a steep recession and slowing global growth.

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

After hitting an annual peak of 68.9 per cent in September with food inflation rising to 93.7 per cent, consumer inflation fell to 57.2 per cent in December.

Despite the heightened challenges, the outlook remains positive with the expected improvements linked to financing assurances from creditors, according to the CBSL statement.

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

India told the International Monetary Fund last week that it strongly supports Sri Lanka's debt restructuring plan, which is an important endorsement for Colombo as it attempts to secure a four-year $2.9 billion programme with the global lender and to bolster its tattered finances.

It is important that CBSL is clear in their communications about domestic debt restructuring, whatever the eventual decision, since that's the main driver of the risk premia attached to market rates, said Thilina Panduwawala, head of research at Colombo-based Frontier Research.

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

Interest rates on three-month government securities have decreased to about 30 per cent from a peak of around 32 per cent earlier this month.

They might start looking at policy rate revisions once inflation is a major turn and the IMF deal is done, said Jonas, a spokesman for the CAL Group.