Sri Lanka held key interest rates steady on Thursday as $130 million flowed in from the World Bank and remittance payments to enable the country to buy urgently needed fuel and cooking gas.
Its central bank reiterated a need for more fiscal and political stability in the crisis-hit economy and said fiscal and legal restructuring plans would be submitted to the government on Friday.
Inflation would remain elevated in the near-term due to supply-side pressures while economic growth will also record a setback, the bank noted.
The Standing Lending Facility rate remained unchanged at 14.50% while the Standing Deposit Facility Rate was steady at 13.50%.
The bank raised rates by a massive 700 basis points at its previous meeting.
“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.
Tighter Monetary Policy
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”, the bank added.
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.
The central bank said fuel that had been stranded at Colombo port had been cleared and would be distributed.
“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.
Inflation hit 29.8% in April with food prices expanding by 46.6% year-on-year in the island nation.
- Reuters, with additional editing by George Russell