Rates & Bonds

Sri Lanka cenbank says high inflation transitory; keeps rates steady

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  • Key rates left steady; no change in statutory reserve ratio
  • Forex reserves seen rising to $3.5 bln by year-end - governor
  • Sri Lanka confident of completing all debt repayments - governor
  • Governor reiterates no need to seek IMF bailout currently

COLOMBO, Nov 25 (Reuters) - Sri Lanka's central bank held interest rates steady on Thursday as it sought to support a nascent economic recovery, saying a recent acceleration in inflation was transitory, driven by supply chain disruptions and surging global commodity prices.

The Central Bank of Sri Lanka (CBSL) left the standing deposit facility rate and the standing lending facility rate unchanged at 5.00% and 6.00%, respectively, as expected by five out of 12 analysts in a Reuters poll. read more

CBSL kept rates steady for a second consecutive meeting after having raised them in August to contain price pressures. It also left its statutory reserve ratio unchanged at 4%.

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"A further acceleration of headline inflation is possible in the immediate future, although such movements are expected to be transitory," the CBSL said in a statement.

The Colombo Consumer Price index (CCPI) rose to 7.6% in October, a 47-month high according to Wealth Trust Securities, from 5.7% in September and well above the central bank's 4%-6% target range.

But some analysts expected inflation to remain lofty, leaving the door open for more monetary tightening.

"We expect inflation to be in the high single digits in the next few months," said Udeeshan Jonas, chief strategist at CAL Group. read more

"We believe that if there is a consistent increase in inflation over the next few months, it may prompt the Central Bank to hike interest rates."

GROWTH OUTLOOK

Sri Lanka's economy saw a strong rebound from the COVID-19 pandemic in the first half of 2021 but a resurgence in cases and resumption of restrictions likely slowed the recovery in the third quarter. The central bank said the external sector had remained resilient.

While the central bank stuck to its 5% real growth forecast for 2021, it said "the ongoing rise in COVID-19 infections both globally and domestically could impact this expectation to some extent."

CBSL said theAugust rate hike would help curb "excessive" consumer demand and contain adverse inflation expectations as it filters through to the real economy. read more

Sri Lanka is facing a massive reserves shortage and with $4.3 billion worth of repayments due in 2022, the country urgently needs to shore up reserves to prevent a depreciation of its currency and rebuild investor confidence.

Sri Lanka's central bank in early October unveiled a six-month roadmap for putting the economy back on track and assured global investors and lenders of timely debt repayments while maintaining macroeconomic stability.

As part of the roadmap, it unveiled measures to attract fresh forex inflows, which the central bank believes will help boost gross official reserves.

"We accept reserves are low but the roadmap will address this," Governor Ajith Nivard Cabraal told a news conference. "We are confident reserves will reach $3.5 billion by the end of the year".

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Editing by Ana Nicolaci da Costa

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