Sri Lanka’s central bank kept its key policy rate unchanged for a second consecutive meeting on Wednesday to underpin the island nation’s economic recovery from its worst financial crisis in decades.
The overnight policy rate, introduced in November, was held at 8% – as expected by a majority of economists polled by Reuters.
“Given the economic fundamentals of growth, inflation, and private sector credit growth, the monetary board did not see the need to ease rates at this point,” Central Bank of Sri Lanka Governor P. Weerasinghe said at a press conference.
The South Asian nation posted a better than expected 5% rise in gross domestic product in 2024, signalling a turning point for an economy that plunged to its worst financial crisis in decades three years ago.
Sri Lanka’s consumer price index contracted 4.2% year-on-year in February, largely due to a reduction in household power tariffs by 20% at the start of the year. The nation suffered record inflation during the 2022 economic meltdown that was triggered by a precipitous fall in dollar reserves.
Inflation is expected to reach positive territory by the middle of 2025 and track closer to the central bank’s target of 5%, Weerasinghe added.
“If inflation falls below target by mid-year, there is a likelihood that CBSL will cut rates,” said Udeeshan Jonas, strategy head at Colombo-based equity research firm CAL.
“Given the possibility of global commodity prices remaining low and concerns about a global trade slowdown, there is a likelihood that inflation can trend lower than the target.”
The CBSL is closely monitoring U.S. tariffs, but does not see a significant impact on Sri Lanka’s exports, particularly apparel, the governor said.
Sri Lanka’s economy has made a “remarkable” recovery from the crisis, the IMF said this month, while approving a fourth tranche of $334 million under a $2.9 billion programme.
The central bank expects growth to be above 3% in 2025 amid a higher year-ago base effect and as the economy navigates global headwinds.
(Reuters)
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