© Reuters. PHOTO: People walk past the main entrance of the Central Bank of Sri Lanka in Colombo, Sri Lanka March 24, 2017. REUTERS/Dinuka Liyanawatte
By Uditha Jayasinghe and Swati Bhat
COLOMBO (Reuters) – Sri Lanka’s central bank kept interest rates steady for a third straight session on Wednesday, as widely expected, saying the prevailing tight monetary stance was key to curbing still-high inflation and restoring economic stability.
The island nation of 22 million people, which is trying to get a $2.9 billion IMF financing package, is in the grip of its worst economic crisis since independence from Britain in 1948.
The fixed interest rate on the credit facility remained stable at 15.50%, while the fixed deposit interest rate remained unchanged at 14.50%, remaining at the highest levels since August 2001.
“The Board felt that maintaining the prevailing tight monetary policy is imperative to ensure that monetary conditions remain firm enough to contain inflationary pressures,” the Central Bank of Sri Lanka (CBSL) said in a statement. .
“Market rates are adjusting as expected, so there was no need to touch the benchmark,” said Udeeshan Jonas, chief strategist at CAL Group.
The CBSL has hiked rates by a whopping 950 basis points between August 2021 and July 2022 to combat rampant inflation. Policymakers are still grappling with challenges on several fronts, including a shortage of foreign currency, a collapsing rupee, a sharp recession and slowing global growth.
The central bank announced that strict monetary and fiscal policy will help reduce inflation to desired levels by the end of 2023 and restore price and economic stability in the medium term.
After hitting an annual peak of 68.9% in September with food inflation rising to 93.7%, consumer inflation moderated to 57.2% in December.
THE AGREEMENT WITH THE IMF IS CRITICAL
The external sector remains resilient despite heightened challenges and the outlook remains positive with expected improvements related to “financial guarantees” from creditors, CBSL said in a statement.
Sri Lanka is committed to paying off all its debts and hopes to complete debt restructuring talks in the next six months, central bank chief P. Nandalal Weerasinghe said on Tuesday.
India last week told the IMF it strongly backed Sri Lanka’s debt restructuring plan, a key support for Colombo as it tries to secure a four-year, $2.9 billion program with the global lender and shore up its ailing finances.
“It is important that CBSL is clear in its communications on domestic debt restructuring, regardless of the final decision, as this is a major driver of market rate risk premiums,” said Thilina Panduwawala, head of research at Colombo-based Frontier Research.
MARKET RATES ARE FALLING
Market interest rates have started to fall and further reductions are expected, the central bank said.
Interest rates on three-month government securities decreased to around 30% from a peak of around 32% at the beginning of this month.
“They may only start considering a review of interest rates after inflation takes a significant turn and the deal with the IMF is completed,” said CAL Group’s Jonas.