Sri Lanka’s central bank holds rates steady; reiterates the need for political stability

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By Uditha Jayasinghe and Swati Bhat

COLOMBO (Reuters) – Sri Lanka’s central bank kept key interest rates stable on Thursday after a massive 700 basis point hike at its previous meeting and reiterated the need for more fiscal measures and political stability in the economy in crisis.

The standing loan facility rate remained unchanged at 14.50% while the standing deposit facility rate remained stable at 13.50%.

“It is envisaged that the recent tightening of monetary conditions and stronger monetary policy communication will help anchor the public’s inflation expectations in the period ahead,” the bank said in a statement https://www. .cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220519_Monetary_Policy_Review_No_4_2022_e.pdf.

The measures taken so far “will continue to feed through to financial markets, as some signs of monetary policy tightening are already being seen in real economic activity,” he added.

The CSE All Share Index was trading down 0.9% at 0530 GMT, having earlier fallen 1.4%. There were no rupee transactions. Traders said they were awaiting comments from the central bank governor at a post-policy news conference.

The central bank said inflation would remain elevated in the near term due to supply-side pressures, while economic growth would also decline.

The nation of 22 million is grappling with a devastating economic crisis as President Gotabaya Rajapaksa’s tax cuts have emptied government coffers, COVID-19 has hit the lucrative tourist industry and rising prices for oil has emptied foreign exchange reserves.

Foreign exchange reserves have plunged to almost zero, leaving Colombo struggling to pay for basic necessities such as fuel, medicine and food.

“In terms of policy credibility … keeping rates unchanged is not good in my opinion,” said Thilina Panduwawala, head of economic research at Frontier Research.

“But from an operational perspective, given how difficult it was for businesses and financial institutions to adjust rates after such a big hike in April, I guess they saw fit to give the system time to adapt in the midst of political uncertainty”.

Inflation hit 29.8% in April, with food prices rising 46.6% year-on-year in the island nation.

The policy measures implemented by the central bank should be backed up by adequate and timely policy adjustments by the government, the bank said.

“Urgent measures are needed to restore greater political stability through consensus governance and social harmony,” he wrote.

Central bank governor P. Nandalal Weerasinghe told reporters earlier this month that without a political solution to the current crisis, the bank’s measures to revive the economy would not succeed and he would step down. unless there is stability in two weeks.

(Reporting by Swati Bhat and Uditha Jayasinghe; Editing by Christopher Cushing and Raju Gopalakrishnan)


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