Sri Lanka key rate 2-decade high at 16.5% after clinching IMF loan

By Anusha Ondaatjie
 

Sri Lanka held its benchmark rate at a two-decade high to keep Asia’s fastest inflation in check while supporting economic recovery after the nation secured a $3 billion International Monetary Fund bailout.
 

The Central Bank of Sri Lanka kept the standing lending facility rate unchanged at 16.5%, according to a statement on its website on Tuesday. Seven of eight economists in a Bloomberg survey expected a hold, while one predicted a 100-basis-point increase. The key rate is at the highest since August 2001.

“The maintenance of the prevailing tight monetary policy stance is necessary to ensure that monetary conditions remain sufficiently tight to facilitate the continuation of the ongoing disinflation process,” the central bank said. It expects price gains to decelerate at a faster pace from this month and sees headline inflation slowing to single-digit levels by end 2023 before stabilizing “at desired levels over the medium term.”

The IMF loan is expected to unlock more funding while providing a reform framework that will enable the island nation to recover from its worst economic crisis in decades. Improving investor sentiment has boosted the local currency and is counted on to bring market rates lower and closer to the policy rate while improving workers’ remittances and tourism help ease balance of payments constraints.

What Bloomberg Economics Says...
 

Inflation is set to cool through 2023 as the International Monetary Fund’s aid disbursement helps ease supply snarls and a high year-earlier base slows year-on-year price gains. That should provide the room needed for the central bank to start cutting rates in the third quarter and support the recovery.

—Ankur Shukla, South Asia economist

“There is sufficient space for further downward adjustment in market interest rates with the improved market sentiments along with the dissipation of elevated risk premia,” the central bank said. “The board remains ready to act appropriately and assure the normalization of the interest rate structure no sooner the price pressures in the economy are sufficiently contained in the period ahead,” it said.

With the funds trickling in, investors are closely watching the progress on debt restructuring. Dollar bondholders want local debt owners to share losses as the South Asian nation recasts $84 billion of debt to bring the economy out of its worst slump in decades.