Sri Lanka holds rates as central bank tries to stabilize harsh economic conditions

COLOMBO  -Sri Lanka’s central bank held policy rates steady on Thursday, saying monetary conditions remain “sufficiently tight” after a massive rate-hike campaign earlier in the year as the crisis-hit nation grapples with red-hot inflation and shortages of dollars.

As widely expected, the Standing Lending Facility rate was held steady at 15.5 percent while the Standing Deposit Facility Rate was kept unchanged at 14.5 percent .

Nine out of 14 economists and analysts polled by Reuters had said they expect rates to remain unchanged.

“Monetary conditions remain sufficiently tight to achieve the envisaged disinflation path in the period ahead,” CBSL said in its statement.

“The contractionary fiscal policies would complement the effects of tight monetary policy measures already in place, helping to mitigate any build-up of aggregate demand pressures, thereby anchoring inflation expectations and bringing down headline inflation to the targeted level of 4-6 percent over the medium term,” they added.

However, inflation has remained high, hitting a record of 68.9 percent in September with food inflation up 93.7 percent , exacerbated by a plunge in the rupee currency and global surge in commodity prices.

Sri Lanka’s economy is also in a deep slump, shrinking an annual 8.4 percent in the June quarter in one of the steepest quarterly declines amid fertiliser and fuel shortages. The central bank predicts an 8.7 percent GDP contraction for 2022.

An acute dollar shortage has left Sri Lanka grappling with its worst financial crisis in seven decades and struggling to pay for essential imports of food, fuel and medicine.

“A recovery in economic activity is expected in 2023 with the envisaged improvements in the supply-side, along with the timely implementation of the required reforms,” CBSL said.