In a widely anticipated move, the Central Bank of Sri Lanka (CBSL) has held its key rates steady on Aug 18, as it awaits the impact of prior rate hikes to filter through the economy where a decline in global commodity prices is also anticipated to ease domestic inflation.
According to Reuters, CBSL has maintained its Standing Lending Facility rate at 15.50% and its Standing Deposit Facility Rate at 14.50%.
This was within the expectations given by 11 out of 15 economists and analysts who predicted that the rates were to be maintained in a Reuters poll.
The article reported that CBSL has increased its rates by 950 basis points year-to-date to battle the excessive high inflation in the country, which is currently suffering from a severe economic crisis.
The government has been struggling to pay for essential imported items of petroleum, fertilisers, food, and medicine due to its foreign currency shortage.
According to the most recent government data, inflation rates have reached 60.8% year-on-year in July this year while food costs soared 90.9%.
In a recent statement, CBSL said that in reaching this conclusion to maintain key rates, the board reviewed the most recent model-based estimates, which pointed to a larger than anticipated contraction in activity and a faster than anticipated easing of price pressures.
The central bank explained that the measures that were taken by it and the government to this point will assist in containing aggregate demand pressures, while a predicted decrease in global commodity prices would be reflected in domestic prices.
According to Thilina Panduwawala, head of research at Frontier Research, the crisis in Sri Lanka is dynamic and it will be crucial to see whether these initial signs of stabilisation continue in the favourable direction which CBSL is expecting, further supported by the progress of IMF and debt restructuring negotiations.
The central bank stated that the impact of ongoing supply interruptions, especially due to power and energy shortages, and concerns linked with socio-political developments likely had “major unfavourable effects” on economic growth in the second quarter.
With tens of thousands of Sri Lankans protesting against the economic crisis that was allegedly caused by president Gotabaya Rajapaksa, he was finally ousted and replaced in July by Ranil Wickremesinghe.
Despite that, CBSL stated that the country’s economy would likely remain sluggish in the third quarter as well with analysts projecting steep contractions for 2022.
“Our GDP projections remain the same at this point with a contraction of 7.5% to 9%. Results for Q2 and Q3 will be the hardest hit. The steepest would likely come in Q2 as a result of political tensions and fuel shortages that were experienced in Sri Lanka in June and July,” Asia Securities macroeconomist Lakshini Fernando commented.
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