Sri Lanka’s Central Bank raises interest rates

The Monetary Board of the Central Bank of Sri Lanka (CBSL), at its meeting held on March 3 (today) decided to raise the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 15.50 per cent and 16.50 per cent, respectively, with immediate effect.

These rates were earllier changed on July 20,2022 for the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank increasing by 100 basis points to 14.50 per cent and 15.50 per cent, respectively.

The CB and the staff of the International Monetary Fund (IMF) have been engaging continuously in intensive negotiations on the monetary policy stance amidst extraordinarily high inflation and a high degree of uncertainty surrounding inflation projections and the near term outlook, the CB said in a media release.

“There have been some differences between the CB and IMF staff on the inflation outlook. Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalisation of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment, which was envisaged during the initial stage of negotiations,” it said.

The CB said this decision demonstrates Sri Lanka’s commitment to the IMF-EFF arrangement, which has been pursued by the Government in order to ensure stability in the economy on multiple fronts. The finalisation of the IMF-EFF arrangement is expected to benefit all stakeholders and bolster confidence, which would help restore stability in the economy on a sustained basis. This will incentivise more foreign exchange flows in the period ahead that would aid the economy to overcome the prevailing economic crisis. The Board was of the view that the economy has already traversed through the most difficult and unprecedented times with tremendous resilience and strongly believes that “today’s decision would pave way for a faster-than-expected deceleration of inflation”.

The Monetary Board anticipates that this monetary policy action would help lower the spread between policy interest rates and high market interest rates. This spread is expected to be further reduced with the reduction in market interest rates in the period ahead, especially the yields on government securities, reflecting the easing of risk premia as the debt restructuring process progresses. “The Board urges all stakeholders to remain hopeful and reiterates its commitment to ensuring price and economic stability, and financial system stability, thereby assuring the normalisation of the interest rate structure no sooner the price pressures are sufficiently contained in the period ahead,” the release said.

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