Swati and Uditha Jayasinghe

COLOMBO (Reuters), – Sri Lanka’s central banks held their key interest rates at steady levels on Thursday, following a dramatic 700 basis point rise at its last meeting. They also stressed the necessity for greater fiscal stability and political stability in a crisis-hit country.

While the rate for Standing Loan Facility was unchanged at 14.50%, it was stable at 13.50%.

“It is envisaged that the recent tightening of monetary conditions and the strengthening of monetary policy communication will help anchor inflation expectations of the public in the period ahead,” the bank said in a statement https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220519_Monetary_Policy_Review_No_4_2022_e.pdf.

It said that while the current measures would continue to be communicated to the financial market, some indications of tighter monetary policies are being seen in real economic activity.

At 0530 GMT the CSE All Share index fell 0.9% after falling by 1.4% previously. No trades were made in rupee. Traders indicated that they were waiting to hear from the central banking governor during a press conference after policy.

The central bank stated that inflation would remain high in the immediate term, due to supply-side tensions. However, economic growth would also suffer.

This nation, home to 22 million citizens, is currently in a terrible economic crisis. Tax cuts implemented by President Gotabaya Rajapaksa have depleted government funds. COVID-19 also hit lucrative tourist industries and inflated foreign exchange reserves.

Colombo is now struggling to cover fuel, medicine, and food because of the collapse in foreign reserves.

Thilina Panduwawala from Frontier Research, chief of economic research said that rates being kept unchanged does not give credibility to policy.

But from an operational perspective, considering how difficult the rates adjustment for corporates is after such a large increase in April, it seems they felt the need to allow the system to adjust amid the political uncertainty.

Inflation reached 29.8% in April, and food prices increased by 46.6% in the island nation.

The bank stated that the central bank’s policy actions must be complemented by timely and appropriate policy adjustments from the government.

It stated that “urgent actions are necessary to restore greater political stability via consensus governance and social unity.”

P. Nandalal Weerasinghe (Central bank governor) told journalists earlier this month that the bank could not revive the economy without finding a political solution. He said that the bank will resign in order to ensure stability for the next two weeks.