© Reuters. FILE PHOTO: People walk past the main entrance of the Central Bank of Sri Lanka in Colombo, Sri Lanka March 24, 2017. REUTERS/Dinuka Liyanawatte
By Uditha Jayasinghe and Swati Bhat
COLOMBO (Reuters) – Sri Lanka’s central bank kept interest rates steady at its third consecutive meeting on Wednesday, as widely expected, saying the current economic instability was necessary to curb inflation and restore financial stability.
The island nation of 22 million people, which is trying to secure a $2.9 billion IMF bailout, has been struggling financially since Britain gained independence in 1948.
The Standing Deposit Facility rate was stable at 15.50% while the Standing Deposit Facility Rate was unchanged at 14.50%, remaining at their highest level since August, 2001.
“The board… felt that monetary policy reform is very important to ensure that money supply remains strong enough to deal with inflationary pressures,” the Central Bank of Sri Lanka (CBSL) said. .
“Market rates are changing as expected, so there was no reason to touch the policy rate,” said Udeeshan Jonas, senior analyst at CAL Group.
CBSL has raised the rates by 950 basis points between August 2021 to July 2022 to counter the rising prices. Policymakers are still grappling with challenges on a number of issues including the lack of foreign exchange, the falling rupee, the economic slowdown and the slowdown in global growth.
The central bank said tight monetary and fiscal policies will help keep inflation down until the end of 2023 and restore price and financial stability in the short term.
After peaking at 68.9% in September and food inflation rising to 93.7%, consumer price inflation reached 57.2% in December.
IMF DEAL CRITICAL
The foreign sector remains strong despite many challenges, and the outlook remains positive with improvements expected to be linked to “financial assurance” from creditors, CBSL said.
Sri Lanka is committed to meeting all its debt obligations and hopes to conclude debt restructuring talks in the next six months, central bank chief P. Nandalal Weerasinghe said on Tuesday.
India told the IMF last week it strongly supports Sri Lanka’s debt restructuring plan, a key concession from Colombo as it tries to protect a four-year $2.9 billion program with the international lender and shore up its battered economy.
“It is important for CBSL to be clear in their speech on domestic debt restructuring, whatever it may be, as it is the main driver of the risk that comes from market prices,” said Thilina Panduwawala, head of research at Frontier Research in Colombo.
THE EVENING IS FALLING
Market interest rates have started to decline and are expected to decline, the central bank said.
The yield on three-month government securities has fallen to around 30% from a high of 32% earlier this month.
“They can only start looking at price changes as soon as they change dramatically and the IMF agreement is over,” said CAL Group’s Jonas.