Dr. Nandalal Weerasinghe

PIC BY Nimsal Siri Edirisinghe

• Cites differences between CB and IMF staff on inflation outlook
• CB believes increase in policy rates unlikely to have an impact on market interest rates
• Says with this rate hike, SL has completed all ‘prior actions’ required to finalise IMF financing 
• Expects policy decision to pay way for faster-than-expected deceleration of inflation

Taking everyone by surprise, the Monetary Board of the Central Bank yesterday raised the policy interest rates by 100 basis points, though many predicted the monetary authority to either maintain the status quo or signal a dovish tilt by cutting rates. 

Inflation, which peaked almost at 70 percent, has been steadily coming down and the Central Bank is hopeful that it will come down to the desired 4-6 percent band by the end of this year, as the island nation appears to have firmly embarked on a disinflation path. 

However, yesterday’s monetary policy decision showed differences of opinion between the Central Bank and International Monetary Fund (IMF), when it comes to inflation projections and expectations.  

“There have been some differences between the CBSL and IMF staff on the inflation outlook,” the Central Bank said in its monetary policy review document. 

In this backdrop, Central Bank Governor Dr. Nandalal Weerasinghe said the Central Bank and IMF reached a consensus to increase the policy interest rates by 100 basis points, though what was agreed with the IMF at the time of entering the staff-level agreement in last September was 250 basis points. 

“Projections are projections. When we move forward, we would know whose projections are right,” Dr. Weerasinghe said, referring to the clear difference of opinion between the Central Bank and IMF about inflation projections.  

Accordingly, it was decided yesterday to raise both the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 15.50 percent and 16.50 percent. 
The monetary policy review was originally scheduled to be announced on Thursday morning but was postponed to Friday afternoon. The reason for the delay could be that the Central Bank and IMF wanted more time to reach a consensus on the policy action.  

However, Dr. Weerasinghe said the increase in policy rates is unlikely to have an impact on the market interest rates, though he said the rate hike would narrow the spread between the policy rates and market interest rates, which have stayed stubbornly high, largely due to the uncertainties stemming from the delay in the IMF bailout and worries pertaining to debt restructuring. 

“The most important thing is that with this rate hike, we have completed all the ‘prior actions’ that will facilitate the unlocking of the IMF financing,” Dr. Weerasinghe 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 policy review document stated.