Sri Lanka Maintains Steady Rates Amid Positive Inflation and Growth Outlook, Reports Reuters

By Uditha Jayasinghe

COLOMBO (Reuters) – The Central Bank of Sri Lanka decided to maintain interest rates on Friday, as anticipated, in response to both domestic and global uncertainties. The bank noted that inflation is projected to remain low and that the economy is performing better than initially expected.

The Central Bank kept the Standing Deposit Facility Rate at 8.25% and the Standing Lending Facility Rate at 9.25%. This decision follows the election of a new president tasked with guiding the country out of its most significant financial crisis in decades.

Governor P. Nandalal Weerasinghe mentioned that there is strong evidence indicating the economy is likely to grow by more than 3%, although it is still too early to provide a specific forecast. He clarified that there would be no update to the Central Bank’s 3% GDP forecast for 2024, although the government may present a revised growth outlook during the upcoming budget presentation by the new finance minister.

The Central Bank indicated that it expects inflation to remain significantly below the target of 5% in the coming quarters, potentially even experiencing deflation in the near term due to adjustments to administratively determined prices and improved supply conditions.

Weerasinghe also noted that inflation could fall below the lower threshold of the target band of 3%-7% for two consecutive quarters as of the end of September. This scenario would necessitate an explanation to the government as mandated by law.

Following a 25 basis point rate cut in July, the Central Bank has reduced rates by a total of 7.25 percentage points since June 2023, partially reversing the 10.50 percentage points of increases that occurred after the financial crisis.

Udeeshan Jonas, head of strategy at a Colombo-based equity research firm, mentioned that both economic growth and credit growth are currently at satisfactory levels. However, he pointed out that the rise in premiums on government securities due to political uncertainty is a concern that the Central Bank would want to address first. He suggested that inflation could increase in the latter half of the year and that upcoming fiscal easing measures expected to be introduced by the new president could also influence prices.

Recently elected president Anura Kumara Dissanayake, who has a Marxist-leaning platform, aims to reduce taxes, combat corruption, and lower the cost of living. Weerasinghe has had preliminary discussions regarding fiscal priorities with the new president, though detailed conversations are yet to occur.

Dissanayake dissolved parliament earlier this week, seeking to strengthen his position in the 225-member legislature ahead of the general election on November 14. His coalition previously held only three seats in the parliament established in August 2020.

On Wednesday, Dissanayake indicated that he plans to commence negotiations with the International Monetary Fund (IMF) to advance the country’s $2.9 billion bailout program.

IMF Senior Mission Chief for Sri Lanka, Peter Breuer, confirmed that discussions are underway for future collaboration, expressing the fund’s eagerness to work with the new president.