2024-01-23 03:32:11
Sri Lanka’s central bank kept interest rates unchanged on Tuesday, in line with market expectations, foregoing a rate cut as a new tax threatens to put upward pressure on spending and fuels concerns regarding inflation.
The Central Bank of Sri Lanka (CBSL) has maintained the standing deposit facility rate at 9% and the standing loan facility rate at 10%, as predicted in a Archyde.com poll.
The central bank said the move aimed to keep inflation at the targeted level of 5% over the medium term, while allowing the economy to reach its potential.
“The board has noted the effects of recent tax developments and supply-side factors that are likely to put upward pressure on inflation in the near term,” the bank said. Central Bank in a statement, adding that any rise in inflation this year is likely to be short-lived.
The central bank cut interest rates by 650 basis points last year as Sri Lanka’s economy began a painful recovery from its worst financial crisis in more than seventy years. thanks to a bailout by the International Monetary Fund (IMF).
Improvements in the economy must translate into improved living conditions for Sri Lankans, the IMF said last week following a visit by its technical staff to the country.
At the start of 2024, the island nation increased its value-added tax (VAT) from 15% to 18% to meet revenue targets under the government’s four-year, $2.9 billion program. IMF.
This might lead to a further rise in Sri Lanka’s key inflation rate, which had fallen to 4% by the end of 2023, following reaching a peak of 70% in September 2022.
The central bank expects the VAT increase to add 2 percentage points to the inflation rate, while analysts predict it will add up to 4 percentage points.
“The rise in inflation is rightly explained as being caused by transitory factors such as the impact of weather on food prices and tax changes. And they believe the rate cuts already made are sufficient for interest rates to continue to fall in the current environment,” said Thilina Panduwawala, head of research at Frontier Research.
Earlier monetary policy easing measures and the reduction in the risk premium on government securities created additional space for the decline in market lending interest rates, the central bank said.
Sri Lanka will need to reach agreements with its creditors in the coming months to pass the second review of the IMF program, scheduled for the first half of 2024. The country’s total external debt stands at $36.4 billion, according to the latest data published by the Ministry of Finance.
Mr Panduwawala expects the central bank to refrain from any further easing for the time being “unless there are visible delays in the restructuring of external debt”.
“Rates on government securities will continue to fall, especially in the short term, and risk premiums will continue to adjust downward with the improvement of the fiscal situation and the completion of the restructuring of the external debt,” he said. said Udeeshan Jonas, chief strategist at equity research firm CAL Group.
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