COLOMBO: Sri Lanka’s central bank kept its key policy rate unchanged for a second consecutive meeting on Wednesday to underpin the island nation’s economic recovery from its worst financial crisis in decades.
The overnight policy rate, introduced in November, was held steady at 8% - in line with a majority of economists polled by Reuters. “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 its statement.
The South Asian nation posted a better-than-expected 5% gross domestic product growth in 2024, signalling a turning point for an economy that plunged to its worst financial crisis in decades three years ago.
Sri Lanka’s consumer price index contracted 4.2% year-on-year in February, largely driven down by a reduction in household power tariffs by 20% at the start of the year. The nation suffered record inflation during the 2022 economic meltdown that was triggered by a precipitous fall in dollar reserves.
Inflation is expected to reach positive territory by the middle of 2025 and track closer to the central bank’s target of 5%, the bank’s statement added.
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“If Inflation falls below target by mid-year there is a likelihood that CBSL will cut rates,” said Udeeshan Jonas, strategy head at Colombo-based equity research firm CAL.
“Given the possibility of global commodity prices remaining low and concerns about a global trade slowdown there is a likelihood that inflation can trend lower than the target.”
Sri Lanka’s economy has made a “remarkable” recovery from the crisis, the IMF said earlier this month, while approving a fourth tranche of $334 million under the $2.9 billion programme.
The central bank expects growth to be above 3% in 2025 due to the higher year-ago base effect and as the economy navigates global headwinds.
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