Sri Lanka Central Bank Holds Rates; Urges Fiscal, Political Stability

Sri Lanka's central bank held its key interest 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 percent while the Standing Deposit Facility Rate was steady at 13.50 percent.

"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 measures taken so far, "would continue to be further transmitted to the financial markets, while some signs of tighter monetary policy already being observed in real economic activity," it added.

The CSE All Share index was trading down 0.9 percent at 0530 GMT, after earlier falling as much as 1.4 percent. There were no trades in the rupee. Traders said they were awaiting comments from the central bank governor at a post policy media briefing.

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.

"In terms of credibility of policy...keeping rates unchanged is not good in my view," said Thilina Panduwawala, head of economic research at Frontier Research.

"But from an operational angle, given how tough the rates adjustment is for corporates and financial institutions is after a such large hike in April, I assume they saw fit to give the system time to adjust amidst the political uncertainty".

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.

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