Sri Lanka cenbank says inflation transitory; holds key rates

  • 11/25/2021
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COLOMBO, Nov 25 (Reuters) - Sri Lanka"s central bank held interest rates on Thursday as it sought to support a nascent economic recovery, saying that a recent acceleration in inflation was transitory, driven by supply chain disruptions and surging global commodity prices. The Central Bank of Sri Lanka (CBSL) left the standing deposit facility rate and the standing lending facility rate unchanged at 5.00% and 6.00%, respectively, as expected by five out of 12 analysts in a Reuters poll. The remaining seven had expected a hike. read more CBSL kept rates steady for a second consecutive meeting after having raised them in August to contain price pressures. It also left its statutory reserve ratio unchanged at 4%. "A further acceleration of headline inflation is possible in the immediate future, although such movements are expected to be transitory," the CBSL said in a statement. The Colombo Consumer Price index (CCPI) rose to 7.6% in October from 5.7% in September, much above the central bank"s 4%-6% target range. But some analysts expected inflation to remain lofty, keeping the door open for more monetary tightening. "We expect inflation to be in the high single digits in the next few months especially with the recent hike in vegetable prices and the removal of price caps on certain essential goods," said Udeeshan Jonas, chief strategist at CAL Group. "We believe that if there is a consistent increase in inflation over the next few months, it may prompt the Central Bank to hike interest rates." GROWTH OUTLOOK The Sri Lankan economy saw a strong rebound from the COVID-19 pandemic in the first half of 2021 but a resurgence in cases and resumption of restrictions likely slowed the recovery in the third quarter. The central bank said the external sector had remained resilient. While the central bank stuck to its 5% real growth forecast for 2021, it said "the ongoing rise in COVID-19 infections both globally and domestically could impact this expectation to some extent." CBSL said its recent monetary policy measures will help curb excessive demand pressures and prevent the build-up of adverse inflation expectations. read more Sri Lanka"s central bank in early October unveiled a six-month roadmap for putting the economy back on track and assured global investors and lenders of timely debt repayments while maintaining macroeconomic stability. As part of the roadmap, it unveiled measures to attract fresh forex inflows. While these are expected to boost gross official reserves, analysts said managing balance of payments pressures will remain crucial. "With the FX reserve position falling below $2.3 billion as of end October, the government"s USD debt raising plans will be critical to manage the FX position in the next few months," Jonas said. Editing by Ana Nicolaci da Costa

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