COLOMBO : Sri Lanka’s central bank is expected to further loosen monetary policy on Thursday, albeit by a smaller degree than previously, as it looks to use the rapid decline in inflation as an opportunity to foster growth and put the economy firmly on a path of recovery.
The median estimate in a Reuters poll of 15 economists and analysts predicts a 100-basis-point cut in both the Standing Deposit Facility Rate and the Standing Lending Facility rate, taking them to 10 per cent and 11 per cent, respectively.
The Central Bank of Sri Lanka (CBSL) has already reduced rates by 450 bps in two moves over June and July.
Sri Lanka’s economy was crushed last year under the worst financial crisis in over seven decades with inflation sky-rocketing and foreign exchange reserves falling to record lows, severely stunting the island nation’s ability to import essential commodities.
CBSL responded by hiking rates by a total 1050 bps until March to contain inflation and rebuild its dollar kitty.
Having secured a $2.9 billion rescue package from the International Monetary Fund (IMF) in March, the Sri Lankan economy has gradually stabilised.
Inflation measured in the key Colombo Consumer Price Index eased to 6.3 per cent in July from a high of 69 per cent last September. Inflation was at 12 per cent in June.
The steep reduction in inflation is creating space for further easing, analysts said, although some predicted the apex bank would wait and watch for the time being.
An additional rate cut on Thursday would help close the gap between policy rates and interest rates of short-term government securities, some analysts added.
“Despite earlier cuts there is a gap of about 300 basis points, which needs to reduce for lending rates to come down,” said Visaahan Arumainayagam, analyst for Colombo-based broking firm Asha Securities.
The decision will be announced via a statement at 7:30 a.m. (0200 GMT) on Thursday.
A shift of focus to improving growth is needed after the economy contracted 7.8 per cent in 2022 and is projected to shrink 2 per cent this year, economists said.
An IMF team will arrive in Colombo in mid-September for the first review of the IMF programme and Sri Lanka is also working to wrap up debt restructuring talks by the end of next month.
For individual contributions, please see table below:
Organisation Key Deposit Rate Key Lending Rate
Acuity 11 per cent 12 per cent
Advocata Institute 11 per cent 12 per cent
CAL Group 11 per cent 12 per cent
HSBC 10 per cent 11 per cent
First Capital 11 per cent 12 per cent
Asha Securites 10 per cent 11 per cent
Capital Economics 10 per cent 11 per cent
Standard Chartered 11 per cent 12 per cent
University of Colombo 11 per cent 12 per cent
S C Securities 10 per cent 11 per cent
Frontier Research 10 per cent 11 per cent
John Keells Stock Brokers 10.75 per cent 11.75 per cent
Asia Securities 10 per cent 11 per cent
Almas Equities 9 per cent 10 per cent
JB Securities 10 per cent 11 per cent
Median 10 per cent 11 per cent
(Polling by Uditha Jayasinghe, Anant Chandak and Susobhan Sarkar; Editing by Swati Bhat and Raju Gopalakrishnan)
Source: CNA
