Sri Lanka's central bank kept interest rates on hold on Tuesday as it gauges the impact of its recent tightening measures and monitors government efforts to secure a $1.5 billion IMF loan to avert a balance of payments crisis.
The country has seen its currency tumble and foreign exchange reserves fall by more than a third in the 16 months to the end of February to $6.6 billion, partly due to paying off some of the massive build-up of debt under the previous government.
The bank had already tightened policy twice in three months as Governor Arjuna Mahendran strives to halt the slide of the rupee due to low rates, a yawning fiscal deficit and capital outflows as the US Federal Reserve begins tightening monetary policy.
On Tuesday the Central Bank of Sri Lanka left its standing deposit facility (SDF) rate and standing lending facility rate (SLFR) at 6.5 percent and 8.0 percent, respectively.
The bank said it expected inflation to remain in the low- to mid-single-digit levels for the rest of 2016 with the policy measures already adopted. Core annual inflation hit a 33-month high of 5.7 percent in February, up from January's 4.6 percent.
Economists had been split over Tuesday's policy outcome, with seven of 13 respondents in a Reuters poll predicting a rate hike and the rest seeing no change.
Rupee forwards fell on Tuesday with dealers saying the currency traded at record low levels.
Sri Lanka is seeking a $1.5 billion loan from the IMF to tide over its finances as the government faces foreign loan repayments of over $4.56 billion, or roughly 6 percent of gross domestic product, in the 12 months to January 2017.
"Market rates are going up due to the borrowing pressure," said Shiran Fernando, an analyst at Colombo-based Frontier Research. "Future direction depends on securing the IMF loan. If not, it would add pressure to monetary policy."
The central bank is also having to manage an economy facing weak overseas demand. It is hoping that higher borrowing costs will temper the risk of overheating in domestic private sector credit growth as well as a recent pick up in inflation.
Private sector credit growth, which slowed in December for the first time since August 2014, picked up to 25.7 percent year-on-year in January from 25.1 percent in the previous month.