Sri Lanka central bank holds rates, says tight conditions key to taming runaway inflation

COLOMBO : Sri Lanka's central bank held interest rates steady for a third straight meeting on Wednesday, as widely expected, saying the prevailing tight monetary stance is crucial to taming still-high inflation and restoring economic stability.

With Sri Lanka's economy in the throes of the worst financial crisis since independence from Britain in 1948, the government is waiting for financing assurances from China, its largest bilateral lender, that would help clinch a $2.9 billion IMF package.

The Standing Lending Facility rate was held steady at 15.50 per cent while the Standing Deposit Facility Rate was kept unchanged at 14.50 per cent, remaining at their highest levels since August, 2001.

"The Board ... was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures," the Central Bank of Sri Lanka (CBSL) said in a statement.

Thirteen out of 14 economists and analysts polled by Reuters had expected rates to be held steady.

The CBSL had increased rates by a massive 950 basis points between August 2021 to July 2022 to fight runaway inflation.

The central bank said tight monetary and fiscal policies will help bring down inflation to desired levels by the end of 2023 and restore price and economic stability over the medium term.

After hitting an annual peak of 68.9 per cent in September with food inflation climbing to 93.7 per cent, consumer inflation moderated to 57.2 per cent in December.

The external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements linked to "financing assurances" from creditors, the CBSL said in its statement.

India told the IMF last week that it strongly supports Sri Lanka's debt restructuring plan as the country tries to put its heavy debt burden on a sustainable path to secure a four-year programme with the global lender.

(Editing by Shri Navaratnam)