Sri Lanka c.bank holds rates steady; expects inflation to ease (updated)

Celestial Asia Securities Holdings

18/08/2022 03:28

(Updates with details, adds analyst comment)
    By Uditha Jayasinghe and Swati Bhat
    COLOMBO, Aug 18 (Reuters) - The Central Bank of Sri Lanka
(CBSL) kept its key rates steady on Thursday, as widely
expected, as it awaits the impact of  past hikes to trickle
through the economy while a fall in global commodity prices is
also expected to soothe domestic inflation.
    The Standing Lending Facility  LKSLFR=ECI  rate stayed at
15.50% while the Standing Deposit Facility Rate  LKSDFR=ECI 
remained at 14.50%.
    Eleven out of 15 economists and analysts polled by Reuters
had expected rates to remain unchanged.  urn:newsml:reuters.com:*:nL4N2ZS1YM
    The central bank has raised rates by a record 950 basis
points so far this year to battle high inflation in Sri Lanka,
which is wilting under a severe economic crisis.
    A foreign exchange shortage has left the government
struggling to pay for essential imports of fuel, fertilisers,
food and medicine.
    Inflation hit 60.8% year-on-year in July and food costs
expanded by a searing 90.9%, according to latest government
data.
    "In arriving at this decision, the board considered the
latest model-based projections, which point towards a larger
than expected contraction in activity and a faster than expected
easing of price pressures," CBSL said in a statement.
    The bank said the measures taken by it and the government so
far would help contain aggregate demand pressures while an
anticipated decline in global commodity prices would pass
through to domestic prices.
    "Given the dynamic crisis situation, going ahead it will be
important to see if these initial signs of stabilisation
continue in the positive direction the CBSL foresees, supported
by progress on the IMF and debt restructuring negotiations,"
said Thilina Panduwawala, head of research at Frontier Research.
    The central bank said the impact of persistent supply side
disruptions, primarily due to shortages of power and energy, and
uncertainties associated with socio-political developments are
expected to have caused "significant adverse effects" on
economic growth in the second quarter.
    Tens of thousands of people protesting against the economic
crisis forced the ouster of the president, Gotabaya Rajapaksa,
in July and he was replaced by Ranil Wickremesinghe. 
    The central bank said growth was likely to remain subdued in
the third quarter as well.
    Analysts said the economy will undergo a steep contraction
this year.
    "Our GDP forecasts remain unchanged at a 7.5%-9.0%
contraction at this point. The 2Q and 3Q will definitely be the
worst hit. The steepest is likely to come in 2Q given the
political tensions and fuel shortages seen in June and July,"
said Lakshini Fernando, a macroeconomist with Asia Securities.

 (Reporting by Swati Bhat and Uditha Jayasinghe; Editing by
Muralikumar Anantharaman and Raju Gopalakrishnan)
 ((swati.bhat@thomsonreuters.com; twitter.com/swatibhat22;
+91-22-68414381; Reuters Messaging:
swati.bhat.thomsonreuters.com@reuters.net))