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COLOMBO – Sri Lanka’s central bank on Thursday set its key interest rate unchanged after a 700 basis point rise in its previous meeting and reiterated the need for more fiscal measures and political stability in a crisis-ridden economy.
The fixed loan interest rate remained unchanged at 14.50% and the fixed deposit interest rate remained stable at 13.50%.
“It is expected that the recent tightening of monetary policy and strengthening of monetary policy will help anchor public inflation expectations in the foreseeable future,” the bank said in a statement. /pr/press_20220519_Monetary_Policy_Review_No_4_2022_e.pdf.
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The measures taken so far, “will continue to be more circulating in the financial markets, while some signs of austerity are already being observed in real economic activity,” it added.
The CSE All Share Index traded down 0.9% at 0530 GMT, after falling as low as 1.4%. There was no transaction in rupee. Traders say they are waiting for the central bank governor’s comments at a post-policy media briefing.
The central bank said that due to supply-side pressures, inflation will remain high in the near future and economic growth will also record a push.
The country of 22 million people is grappling with a devastating economic crisis as President Gotabaya Rajapaksa’s tax cuts have eroded public coffers, hit COVID-19’s lucrative tourism industry and pushed up oil prices to empty foreign exchange reserves.
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Overseas reserves have plummeted to almost zero, with Colombo struggling to pay for much-needed supplies such as fuel, medicine and food.
“In terms of policy credibility … I don’t think it’s good to keep rates unchanged,” said Thilina Panduwala, head of economic research at Frontier Research. “But from an operational angle, given how difficult it is for corporate and financial institutions to adjust rates after such a large increase in April, I think they should take the time to adjust the system in the midst of political uncertainty.”
Food prices rose 46.6% in April, pushing inflation to 29.8%.
The policy measures implemented by the central bank need to be strengthened by the government through adequate and timely policy coordination, the bank said.
“Urgent steps are needed to restore greater political stability through consensus rule and social harmony,” it wrote.
Central Bank Governor P. Nandalal Warasinghe told reporters earlier this month that without a political solution to the current crisis, the bank’s efforts to revive the economy would not succeed and that he would resign if there was no stability within two weeks. (Reporting by Swati Bhatt and Udita Jaysingh; Editing by Christopher Cushing and Raju Gopalakrishnan)