Sri Lanka central bank to hold rates, await clarity from new president, election

COLOMBO : Sri Lanka’s central bank is expected to hold interest rates steady on Friday as it awaits clarity from the new president on his plans to forge a stronger rebound from a crippling financial crisis.

Attracted by his pledges to slash taxes, fight corruption, and reduce the cost of living, millions of Sri Lankans voted on Saturday to elect Marxist-leaning parliamentarian Anura Kumara Dissanayake as president.

Dissanayake dissolved parliament on Tuesday and is hoping to strengthen his hand in the 225-member house when a general election is held on Nov. 14. His coalition held just three seats in the parliament elected in August 2020.

Ten of 14 economists and analysts polled by Reuters expect the central bank to leave its Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) unchanged at 8.25 per cent and 9.25 per cent, respectively.

“Inflation and growth are doing well at this point so it is unlikely the central bank will change rates, especially given the political situation,” said Raynal Wickremaratne, co-head of research at Softlogic Stockbrokers.

A severe shortfall of dollars spun Sri Lanka’s economy into a deep financial crisis two years ago, sending inflation soaring to a high of 70 per cent in September 2022 and forcing the country to default on its foreign debt.

With government finances and capital flows buttressed by a $2.9 billion IMF bailout programme, inflation cooled to 0.5 per cent in August and the island-nation’s economy is set to grow at 3 per cent for the first time in three years.

Dissanayake’s presidency, however, has also pushed progress on the crucial IMF deal and a $25 billion debt restructuring it underpins into limbo as markets and investors await policy clarity.

The Central Bank of Sri Lanka (CBSL) cut rates by 25 basis points in July as part of an easing cycle that has seen rates drop by 7.25 per centage points since June 2023, partially reversing 10.50 per centage points of increases at the height of the crisis.

For detailed poll responses, see the table below:

Organisation SDFR SLFR

Acuity 8.25 9.25

Advocata Institute 8.25 9.25

CAL Group 8.25 9.25

Citigroup 8.25 9.25

First Capital 8.25 9.25

Asha Securites 8.25 9.25

HSBC 8.25 9.25

University of Colombo 8.25 9.25

Frontier Research 8 9

Asia Securities 8.25 9.25