Central bank keeps policy rates steady
In line with market expectations, Sri Lanka’s central bank kept interest rates steady, forgoing a rate cut as a new tax threatened upward pressure on expenses and fuelled concerns about inflation.
The Central Bank of Sri Lanka (CBSL) maintained the Standing Deposit Facility Rate at 9% and the Standing Lending Facility Rate at 10%, as predicted in a Reuters poll.
The central bank said the decision aimed to maintain inflation at the targeted level of 5% over the medium term while enabling the economy to reach its potential.
“The Board took note of the effects of the recent developments in taxation and supply-side factors that are likely to pose upside pressures on inflation in the near term,” it said in a statement, adding that any such uptick in consumer prices this year was expected to be short-lived.
The central bank slashed interest rates by 650 basis points last year as Sri Lanka’s economy began a painful recovery from its worst financial crisis in more than seven decades, helped by a bailout by the International Monetary Fund (IMF).
Improvements in the economy need to be translated into improved living conditions for Sri Lankans, the IMF said last week, wrapping up a technical staff visit to the country.
At the start of 2024, the island nation raised its value-added tax (VAT) to 18% from 15% to meet revenue targets under the four-year $2.9 billion IMF program.
That could spark a renewed rise in Sri Lanka’s key inflation rate, which had eased to 4% at the end of 2023 from a high of 70% in September 2022.
Sri Lanka could see inflation spike to “just under 7% in January” due to tax and short-term vegetable price increases, CBSL Gov. Nandalal Weerasinghe said.
“But inflation will trend down and return to the 4%-6% band targeted by the central bank. The uptick in inflation will remain for the first couple of months at about 6%.”
The inflation spikes are likely to be short-lived as the central bank does not see demand pressure building up in the economy, Weerasinghe added.