Sri Lanka central bank keeps key rates unchanged amid debt crisis

Sri Lanka's central bank held its key lending and borrowing rates steady on Thursday following a massive 700 basis points increase at its previous meeting and reiterated the need for more fiscal measures and political stability in the crisis-hit economy.

The Standing Lending Facility rate remained unchanged at 14.50% while the Standing Deposit Facility Rate was steady at 13.50%.

"It is envisaged that the recent tightening of monetary conditions and the strengthening of monetary policy communication will help anchor inflation expectations of the public in the period ahead," the bank said in a statement.

The central bank said inflation will remain elevated in the near term due to supply-side pressures while economic growth will also record a setback.

The nation of 22 million people is battling a devastating economic crisis as tax cuts by President Gotabaya Rajapaksa drained government coffers, COVID-19 hit the lucrative tourism industry and rising oil prices emptied foreign exchange reserves.

Foreign reserves have plunged to almost zero, leaving Colombo struggling to pay for such essentials as fuel, medicines and food.

"Central bank believes that the policy changes that they enforced at the last meeting are gradually starting to show results. Market interest rates have also adjusted," said Uddeshan Jonas, chief strategist at Capital Alliance Group.

"They will overlook inflation figures in the short term since is entirely supply side related," he added.

Inflation hit 29.8% in April with food prices expanding by 46.6% year-on-year in the island nation.

The policy measures implemented by the central bank need to be reinforced by adequate and timely policy adjustments by the government, the bank said.

"Urgent measures are required to restore greater political stability through consensus governance and social harmony," it wrote.

Central bank Governor P. Nandalal Weerasinghe told reporters earlier this month that without a political solution to the current crisis, the bank's steps to revive the economy would not be successful and he would resign unless there was stability in two weeks.

(Reporting by Swati Bhat and Uditha Jayasinghe; Editing by Christopher Cushing and Raju Gopalakrishnan)