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Sri Lanka Central Bank Keeps Rates Steady Amid Economic Crisis

srilanka may31 25jan23 lt

Sri Lanka's central bank kept its key interest rates unchanged on Wednesday as runaway inflation showed signs of slowdown, and amid the country's negotiations with the International Monetary Fund to secure a $2.9 billion rescue deal to get the economy back on track.

The Monetary Board of the Central Bank of Sri Lanka decided to maintain the Standing Deposit Facility Rate at 14.50 percent and the Standing Lending Facility Rate at 15.50 percent.

The previous change in the interest rate was a full percentage hike last July. The bank had hiked rates by a massive 700 basis points in April 2022.

The Board assessed that the current monetary policy stance is appropriate to ensure that underlying monetary conditions in the economy remain sufficiently contained to drive inflation along the envisaged disinflation path.

Although the headline and core inflation rates continued to decelerate at the end of 2022, inflation remained very high. The central bank expects downward adjustment in inflation to continue through 2023.

Recent official data showed that consumer price inflation in the capital Colombo slowed for a third month in a row to 57.2 percent in December. Food inflation eased to 59.3 percent.

The economy is forecast to recover gradually during the year, underpinned by the expected improvements in domestic supply conditions, helped by the timely implementation of corrective policy measures.

Capital Economics' economist Shivaan Tandon said with inflation still very high and the authorities keen to agree a deal with the IMF as soon as possible, a cut in policy rate is unlikely.

The CBSL is expected to leave rates on hold for the rest of the year as it aims to strike a fine balance between supporting a struggling economy and clamping down on high inflation.

India has given financial assurance to IMF, which is required to unlock the $2.9 billion bailout package for Sri Lanka.

Sri Lanka was negotiating with its major creditors, namely China, Japan and India to secure financial assurances to get the bailout package. The IMF had earlier demanded Sri Lanka to restructure its debt with major creditors.

Over the weekend, China has reportedly confirmed willingness to restructure debt in line with the financing envelope in the IMF program.

After the outbreak of socioeconomic and political crisis last year, which is the worst in the country over many decades, the government and the central bank implemented several painful measures to restore macroeconomic balance.

In the face of crisis, the CBSL tightened its policy to arrest inflationary pressures.

As the country faced dire foreign exchange shortage, the bank temporarily suspended selected foreign debt and also contained foreign exchange outflows. Additional measures were also taken to preserve stability in the financial system.

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