After a huge 700 basis point hike at its previous meeting, Sri Lanka’s central bank left its benchmark interest rates constant on Thursday, reiterating the need for stronger fiscal measures and political stability in the economy in crisis. The rate on the Standing Loan Facility remained at 14.50%, while the rate on the Standing Deposit Facility remained at 13.50%. “The recent tightening of monetary conditions and improved monetary policy communication should help support public inflation expectations going forward,” the bank said in a statement. The measures adopted so far “will continue to be transmitted to financial markets”, he said, adding that “some indicators of monetary policy tightening are already noticeable in real economic activity”.
The nation of 22 million is grappling with a devastating economic crisis as President Gotabaya Rajapaksa’s tax cuts have emptied government coffers, COVID-19 has hit the lucrative tourist industry and rising prices for oil has emptied foreign exchange reserves. Foreign exchange reserves have plunged to almost zero, leaving Colombo struggling to pay for basic necessities such as fuel, medicine and food.
The CSE All-Share Index was trading down 0.9% at 0530 GMT, having earlier fallen 1.4%. There were no rupee transactions. Traders said they were awaiting comments from the central bank governor at a post-policy news conference. The central bank said inflation would remain elevated in the near term due to supply-side pressures, while economic growth would also decline.
“In terms of policy credibility … keeping rates unchanged is not good in my opinion,” said Thilina Panduwawala, head of economic research at Frontier Research. “But from an operational perspective, given how difficult it was for businesses and financial institutions to adjust rates after such a big hike in April, I guess they saw fit to give the system time to adapt in the midst of political uncertainty”. Inflation hit 29.8% in April, with food prices rising 46.6% year-on-year in the island nation.
The policy measures implemented by the central bank should be backed up by adequate and timely policy adjustments by the government, the bank said. “Urgent measures are needed to restore greater political stability through consensus governance and social harmony,” he wrote. Central bank governor P. Nandalal Weerasinghe told reporters earlier this month that without a political solution to the current crisis, the bank’s measures to revive the economy would not succeed and he would step down. unless there is stability in two weeks.
Summary of news:
- Sri Lanka’s central bank holds interest rates steady, stresses need for political stability
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