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(Bloomberg) — Sri Lanka’s central bank kept its benchmark interest rate steady for the second straight meeting to steer inflation toward the target while bolstering an economic recovery.
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The Central Bank of Sri Lanka held the overnight policy rate at 8% on Wednesday, in line with a median forecast of economists surveyed by Bloomberg.
“The Board remains confident that the prevailing monetary policy stance will ensure that inflation will move towards the target of 5% while supporting the growth of the domestic economy,” the central bank said in a statement on its website.
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Sri Lanka’s economy expanded 5% last year, bouncing from a contraction of 2.3% in 2023, and is expected to sustain the pace in the current year. While the International Monetary Fund’s $3 billion bailout has stabilized the economy after an unprecedented crisis, the country will need to increase energy prices and meet fiscal parameters for further aid.
A deflationary environment is also providing some reprieve for the South Asian nation that had struggled with surging prices during a historic default in 2022. Sri Lanka has recorded deflation since September, but the central bank projects the conditions will ease from this month, with inflation projected to turn positive by mid-2025.
“Risks to the inflation and growth outlook remain broadly in balance,” the central bank said.
What Bloomberg Economics Says
The policy rate is at an appropriate level, based on our estimates of inflation and the output gap. Any easing beyond this point could cause the economy to overheat — leading to an undesirable jump in imports which would pressure FX reserves and hit the rupee. We doubt the central bank will want to risk those events.
Ankur Shukla, economist
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The monetary authority said it remains watchful, among other things, of the possible impact of global trade and geopolitical uncertainties on the Sri Lankan economy. “The Board stands ready to respond to emerging risks to maintaining price stability while supporting the economy to reach its potential,” it added.
—With assistance from Shinjini Datta, Asantha Sirimanne, Devidutta Tripathy, Malavika Kaur Makol, Akriti Sharma and Shwetha Sunil.
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