Sri Lanka keeps key rate at 15.5% as country awaits IMF loan

SRI Lanka kept its benchmark interest rate unchanged for a fourth straight meeting as Asia’s fastest inflation showed signs of cooling while the bankrupt economy seeks to turn a corner pending a crucial bailout.

The Central Bank of Sri Lanka held the standing lending facility rate at 15.5 per cent on Wednesday (Jan 25), a move predicted by all five economists in a Bloomberg survey.

“The maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures,” the central bank said in a statement on its website. “Tight monetary conditions, together with the tight fiscal policy, are expected to adjust inflation expectations downward.”

The decision came a day after governor Nandalal Weerasinghe said policymakers are starting to see disinflation and price gains should ease to single-digit levels by the end of 2023. Last year’s steep tightening of 950 basis points minimised further damage to an economy that’s now seeing tourism and remittances pick up, bringing much-needed foreign currency inflows to help tide the country over, he said Tuesday.

What will move the needle for the island nation in recession is the US$2.9 billion International Monetary Fund (IMF) programme that has been delayed. The IMF bailout will unlock more financing and should set the nation into a more sustainable recovery path.

Some relief is in sight. Sri Lanka’s two of three major bilateral creditors — China and India — have indicated their willingness to support the nation’s debt recast, with Japan yet to give indications. The IMF needs the support of the three creditor nations before approving the bailout. Discussions on domestic debt will ensue after, the central bank chief said.

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Cooling inflation provides the monetary authority more scope to support an economy that ground to a halt last year following the debt crisis. Price gains eased for a third month in December to 57.2 per cent and is expected to keep on decelerating until they reach the ideal level of 4-5 per cent towards the end of the year, the central bank said earlier this month.

The central bank also expects a gradual economic recovery from the second half of 2023 after falling deeper into recession last year. BLOOMBERG