22-8-2023 (COLOMBO) Sri Lanka’s central bank is expected to announce a further easing of monetary policy on Thursday, albeit to a lesser extent than before, as it seizes the opportunity presented by a sharp drop in inflation to stimulate economic growth and steer the nation towards a robust recovery.
According to a Reuters poll of 15 economists and analysts, the median estimate anticipates a 100-basis-point reduction in both the Standing Deposit Facility Rate and the Standing Lending Facility rate, bringing them to 10 percent and 11 percent, respectively.
The Central Bank of Sri Lanka (CBSL) has already implemented two rate cuts in June and July, amounting to a cumulative 450 basis points reduction.
Sri Lanka’s economy was severely battered last year by its worst financial crisis in over seven decades. Inflation soared, and foreign exchange reserves hit record lows, severely hampering the nation’s ability to import essential goods.
In response, CBSL raised rates by a total of 1,050 basis points until March to control inflation and rebuild its foreign currency reserves.
Since securing a $2.9 billion rescue package from the International Monetary Fund (IMF) in March, Sri Lanka’s economy has gradually stabilized.
Inflation, as measured by the Colombo Consumer Price Index, eased to 6.3 percent in July from a peak of 69 percent last September. In June, inflation stood at 12 percent.
The significant decline in inflation has created room for further monetary easing, though some analysts expect the central bank to adopt a cautious approach for the time being.
An additional rate cut on Thursday could help narrow the gap between policy rates and the interest rates on short-term government securities, according to some analysts.
“Despite earlier cuts, there is still a gap of around 300 basis points that needs to be closed for lending rates to decrease,” said Visaahan Arumainayagam, an analyst at Colombo-based brokerage firm Asha Securities.
The central bank’s decision will be conveyed through a statement at 7:30 a.m. (0200 GMT) on Thursday.
Economists argue that a shift towards promoting economic growth is necessary after Sri Lanka’s economy contracted by 7.8 percent in 2022 and is projected to shrink by 2 percent this year.
In mid-September, an IMF team will arrive in Colombo for the first review of the IMF program, and Sri Lanka is also working to conclude debt restructuring talks by the end of next month.
