Sri Lanka's Central Bank Maintains Interest Rates to Control Inflation and Ensure Stability

On May 28, 2024, the Central Bank of Sri Lanka (CBSL) opted to maintain its interest rates, aiming to control inflation and promote economic stability. The Standing Deposit Facility Rate remains at 8.50%, and the Standing Lending Facility Rate stays at 9.50%.

This decision came as a surprise to some market analysts, who had anticipated a 50-basis-point rate cut. However, the CBSL emphasized the importance of keeping inflation in check, noting that the annual inflation rate stood at 1.5% in April, down from 6.4% at the start of the year.

The central bank stated, *"Incoming data suggests that headline inflation is likely to be below the targeted level of 5% in the upcoming months as a result of the combined impact of the administered price adjustments and eased food prices, although some upside risks remain."*

Why this matters: The Central Bank of Sri Lanka's decision to maintain interest rates has significant implications for the country's economy and financial stability. If not managed properly, it could lead to higher inflation, reduced economic growth, and increased financial hardship for citizens.

Despite maintaining rates, the CBSL noted that there is still room for market lending interest rates to decline further. The bank reiterated the need for lenders to pass on the benefits of lower rates to borrowers without delay, in line with its monetary policy review.

Udeeshan Jonas, chief strategist at CAL Group, commented, "The weighted average lending rate need to adjust more. That is what will assist people to borrow. It's clear the central bank wants private sector credit to expand to boost growth."

Sri Lanka's economy is projected to grow by 3% in 2024, following a $2.9 billion lending program secured from the International Monetary Fund (IMF) in March. The island's economy had previously contracted by 7.3% in 2022 and 2.3% last year triggered by a severe financial crisis stemming from a record shortfall of dollar reserves and substantial debt.

The country now faces a June deadline to secure a deal with its bilateral creditors and to reach an agreement with bondholders to renegotiate its foreign debt and release a third tranche of $337 million from the IMF, as part of its economic recovery efforts.

The CBSL's decision to maintain interest rates highlights its commitment to controlling inflation while promoting economic stability. During this period of financial challenges, the central bank's policies will play a vital role in shaping Sri Lanka's economic future.

Key Takeaways

• CBSL maintains interest rates at 8.50% and 9.50% to control inflation.
• Inflation rate stands at 1.5% in April, down from 6.4% at the start of the year.
• CBSL aims to promote economic stability and growth amidst financial challenges.
• Sri Lanka's economy is projected to grow by 3% in 2024 with IMF lending program.
• CBSL faces June deadline to secure deal with creditors and renegotiate foreign debt.