Central Bank seen keeping rates steady as political tensions ease

(Colombo) REUTERS: The Central Bank is expected to leave its key interest rates steady tomorrow, a Reuters poll showed, as the island’s economy slowly recovers from a political crisis that sparked credit downgrades by all three major global rating agencies.

The rupee fell to a record low in early January but has recovered slightly, giving policymakers some breathing room but the government’s financial position remains shaky. 

All 11 economists surveyed expected the Central Bank of Sri Lanka to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) steady at 8.00 percent and 9.00 percent, respectively. 

The Central Bank raised SDFR by 75 bps and SLFR by 50 bps in November, while reducing the statutory reserve ratio (SRR) by 150 bps to 6.00 percent. All of analysts also expected the SRR to be kept steady. 

“We expect the Central Bank to hold rates as there is no real time to assess the impact of the November hike,” said First Capital Holdings Research Head Dimantha Mathew. “We don’t think you can go for further hikes with the current GDP rate. We also can’t go for rate cut as it might lead to further outflows,” which will erode foreign exchange reserves, he said. 

Sri Lanka stated discussion with the International Monetary Fund (IMF) last week to continue a US $ 1.5 billion loan, which has been delayed after the political crisis unfolded in October. 

President Maithripala Sirisena’s abrupt change of prime minister and his decision to dissolve parliament created panic and uncertainty among investors. The move was later ruled unconstitutional and Ranil Wickremesinghe was reinstated after a 51-day political crisis. 

Wickremesinghe’s government aims to focus on economic growth, which has been sluggish due to tight policies, ahead of a presidential poll later this year and general election in 2020. 

The Sri Lankan rupee hit an all-time low of 183.00 per dollar on January 3 but has recovered 1.8 percent since then as political tensions eased and foreign investors returned to the island nation’s government bonds. 

Economic growth edged up to 3.3 percent in the first nine months of 2018, from 3.2 percent in the same period a year earlier.