Central Bank Holds Interest Rates Steady amid Economic and Political Snags
September 28, Colombo (LNW): Sri Lanka’s central bank opted to keep its interest rates unchanged on Friday, a decision expected by many due to the ongoing domestic and global uncertainties.
The Central Bank of Sri Lanka (CBSL) held the Standing Deposit Facility Rate at 8.25% and the Standing Lending Facility Rate at 9.25%. Despite these challenges, CBSL noted that inflation is projected to remain low, and the nation’s economy is performing better than anticipated.
CBSL Governor P. Nandalal Weerasinghe reported that the economy is expected to grow by over 3%, though no formal revision to the 2024 GDP forecast has been made yet. However, the government is expected to provide updated growth estimates when the new finance minister presents the national budget.
In its statement, CBSL highlighted that inflation is likely to stay below its 5% target over the next few quarters, with the possibility of deflation occurring in the near term.
Weerasinghe mentioned that inflation might drop below the lower end of the central bank’s target range of 3% to 7% by the end of September, requiring a formal explanation to the government as mandated by law.
The CBSL has already cut rates by 25 basis points in July as part of a broader effort to ease monetary policy. This has resulted in a total rate reduction of 7.25 percentage points since June 2023.
Financial analysts, like Udeeshan Jonas from Colombo-based research firm CAL, have noted that while credit growth remains steady, political instability has pushed up premiums on government securities.
This may have influenced CBSL’s decision to maintain rates until further political clarity is achieved. Jonas also warned that inflation could pick up in the second half of the year, particularly with fiscal easing measures expected in the upcoming budget.
The central bank’s decision comes at a politically significant moment for Sri Lanka, following the recent election of President Anura Kumara Dissanayake. Known for his Marxist-leaning policies,
Dissanayake has pledged to lower taxes, combat corruption, and reduce the cost of living. His election, however, has brought political uncertainty, particularly as he has dissolved parliament in hopes of gaining a stronger mandate in the upcoming general election on November 14.
On the international front, Sri Lanka is moving forward with its $2.9 billion bailout program with the International Monetary Fund (IMF). President Dissanayake has stated that negotiations with the IMF will commence soon to advance the deal.
In addition, CBSL is preparing to shift to a single policy rate by the end of 2024, a move aimed at increasing transparency.
The transition will involve consultations with market participants and technical assistance from the IMF.
Some analysts have raised concerns that the shift to a single rate could increase volatility in the exchange rate, potentially destabilizing the economy. However, CBSL remains confident in the move and aims to implement the change before the year’s end.
