Sri Lanka central bank holds rates as it awaits crucial IMF deal

Sri Lanka's central bank held interest rates steady for a third straight meeting on Wednesday, as widely expected, saying the prevailing tight monetary stance is crucial to taming still-high inflation and restoring economic stability.

The island nation of 22 million people, which is trying to clinch a $2.9 billion IMF funding package, is in the grip of its worst economic crisis since independence from Britain in 1948.

The Standing Lending Facility rate was held steady at 15.50 percent while the Standing Deposit Facility Rate was kept unchanged at 14.50 percent, remaining at their highest levels since August, 2001.

"The Board … was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures," the Central Bank of Sri Lanka (CBSL) said in a statement.

"Market rates are adjusting as expected, so there was no need to touch policy rate," said Udeeshan Jonas, chief strategist at CAL Group. The CBSL had increased rates by a massive 950 basis points between

August 2021 to July 2022 to fight runaway inflation.

Policymakers are still grappling with challenges on several fronts including a shortage of foreign currency, a collapse in the rupee, a steep recession and slowing global growth.

The central bank said tight monetary and fiscal policies will help bring down inflation to desired levels by the end of 2023 and restore price and economic stability over the medium term.

After hitting an annual peak of 68.9 percent in September with food inflation climbing to 93.7 percent, consumer inflation moderated to 57.2% in December.

The external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements linked to "financing assurances" from creditors, the CBSL statement said.

Sri Lanka is committed to meeting all its debt repayments and is hoping to complete debt restructuring negotiations in the next six months, central bank chief P. Nandalal Weerasinghe said on Tuesday.

India told the IMF last week that it strongly supports Sri Lanka's debt restructuring plan, a crucial endorsement for Colombo as it tries to secure the four-year $2.9 billion programme with the global lender and bolster its tattered finances.

"It is important CBSL is clear in their communications about domestic debt restructuring, whatever the eventual decision, since that's the big driver of the risk premia attached to market rates," said Thilina Panduwawala, head of research at Colombo-based Frontier Research.

Market interest rates have begun to move down and are expected to ease further, the central bank said.

Interest rates on three-month government securities have eased to about 30% from a peak of around 32% earlier this month.

"They may only start looking at policy rate revisions once inflation makes a substantial turn and the IMF deal is through," said CAL Group's Jonas.