Sri Lanka central bank likely to hold rates next week after 100 bps hike earlier

Sri Lanka central bank likely to hold rates next week after 100 bps hike earlier
© Reuters. FILE PHOTO: A woman walks past the main entrance of the Sri Lanka’s Central Bank in Colombo, Sri Lanka February 7, 2017. REUTERS/Dinuka Liyanawatte

By Uditha Jayasinghe

COLOMBO (Reuters) – Sri Lanka’s central bank is expected to keep interest rates unchanged at a policy meeting next week, a month after a 100 basis points increase ahead of a bailout package from the International Monetary Fund (IMF).

Inflation remains at slightly over 50 percent, although it is on a downward trend, and growth is expected to shrink by 3% in 2023 as the country struggles to emerge from its worst financial crisis in over seven decades.

A dozen out of the fourteen analysts and economists polled by Reuters expect rates to be held by the Central Bank of Sri Lanka (CBSL) on Tuesday in its third policy rate announcement this year.

The central bank raised rates by a record 950 basis points last year to tame inflation and by 100 bps on March 3.

Sri Lanka needs to maintain high interest rates to drive down inflation that hit 50.6% in February and maintain investor confidence as it embarks on the tricky task of debt restructuring, analysts said.

“Inflation needs to come down to about 15% or below policy rates before they start lowering interest rates,” said Shehan Cooray, head of research at Acuity Stockbrokers.

“Even with lower inflation, Sri Lanka will still have to keep interest rates quite high to maintain a cap on imports, manage reserves and bridge financing gaps over the next three years. Rates will not drop significantly this year.”

Any easing of rates will likely happen around September or October, analysts said, in parallel with central bank predictions of inflation falling to a single digit at the start of the third quarter.

Sri Lanka will kick off a reworking of part of its domestic debt next month and aims to finalise it by May.

The financially strapped South Asian country will also start formal negotiations for the debt it owes to bilateral creditors and overseas bondholders after the domestic debt operation, aiming to complete those parallel debt talks by September, in time for the first IMF review.

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