Central Bank to cut key rates in second quarter to aid recovery in 2024.
By: Staff Writer
January 09, Colombo (LNW): Sri Lanka’s central bank will be lowering interest rates further in an unexpected move to boost growth, while projecting inflation would remain subdued over the medium term in the second quarter this year.
Helped by its bailout by the International Monetary Fund, the South Asian island nation is recovering from its worst financial crisis in seven decades and awaiting the finalisation of its first review from the global lender.
Economists expect Sri Lanka’s central bank to pause now but resume its rate cut cycle in the second quarter of this year to bolster the island nation’s recovery after an unprecedented crisis.
With this reduction, further easing will be paused in the near term, it added, given that space exists for market interest rates to adjust downwards and reiterated the need for that to happen to ease domestic monetary conditions further.
The standing lending facility rate, currently at 10%, is seen to stay on hold for a quarter and be followed by a cut of 50 basis points in the April-June period, according to the latest median estimates in a Bloomberg survey.
After reducing borrowing costs by 650 basis points last year, Sri Lanka’s central bank signaled it will pause as the economy gradually turns around and inflation bottoms out.
“While the economy is now recovering from the political and economic crisis, it remains very weak, with output around 20% below its pre-crisis peak,” said Gareth Leather, economist at Capital Economics.
The central bank will keep monetary policy unchanged at its next review, but the pause won’t last for long, he said, penciling rate cuts of 200 basis points this year.
With demand gathering pace, analysts expect consumer prices to inch up. The survey showed economists raising their outlook on headline inflation through 2024, with the first and second quarters’ forecasts at 6% and 7%, respectively.
The International Monetary Fund has so far disbursed a total of $670 million under its bailout plan, helping Sri Lanka in overcoming shortages of food, fuel and raw materials. Authorities are in the process of restructuring the nation’s debt to secure more funds.
Sri Lanka’s economy is seen to expand 3.3% this year from a contraction of 2.5% in 2023, the survey showed.