Sri Lanka Holds Rates Steady, Citing Positive Inflation and Growth Outlook

Sri Lanka’s central bank kept its key interest rates unchanged on Friday, citing a positive economic outlook and expectations for continued low inflation. The decision comes as the island nation navigates its recovery from its worst financial crisis in decades, with a newly elected president at the helm.

The Central Bank of Sri Lanka (CBSL) held the Standing Deposit Facility Rate at 8.25% and the Standing Lending Facility Rate at 9.25%. Governor P. Nandalal Weerasinghe expressed optimism about the country’s economic trajectory, stating, “We see strong evidence that the economy will grow well over 3% this year.”

While the CBSL is not yet revising its official 3% GDP growth forecast for 2024, the government is expected to provide an updated outlook in its upcoming budget announcement.

The central bank also expects inflation to remain subdued, projecting it to stay “well below the target of 5% over the next few quarters.” The CBSL even anticipates the possibility of deflation in the near term, driven by adjustments to administratively determined prices and improved supply conditions.

This positive outlook comes after a series of rate cuts implemented by the CBSL since June 2023, totaling 7.25 percentage points. These cuts partially reversed the 10.50 percentage points of increases implemented in response to the financial crisis.

However, analysts caution that inflation could pick up in the latter half of the year, and the new president’s planned fiscal easing measures could also impact prices.

Anura Kumara Dissanayake, elected president last Saturday, has pledged to reduce taxes, combat corruption, and lower the cost of living. While these measures aim to address economic hardship, they could also stimulate inflation and complicate the central bank’s efforts to maintain price stability.

Key Takeaways:

• Sri Lanka’s central bank maintained its key interest rates, citing a positive economic outlook and expectations for low inflation.
• The central bank expects GDP growth to exceed 3% in 2024 and inflation to remain below its 5% target.
• Analysts warn that inflation could rise in the second half of the year, influenced by potential fiscal easing measures.
• The newly elected president has pledged to reduce taxes and address the cost of living, potentially impacting inflation.

Sri Lanka’s economic recovery remains a work in progress, with the new president facing significant challenges in balancing fiscal stimulus with maintaining macroeconomic stability. The central bank’s decision to hold interest rates steady reflects its confidence in the current economic trajectory but also signals a cautious approach as it monitors the impact of upcoming policy changes.