COLOMBO (Reuters) – Sri Lanka’s central bank is widely expected to loosen monetary policy further on Thursday, following a massive 250-basis-point interest rate cut in June, as it looks to revive growth amid a rapid fall in inflation.
Sri Lanka’s economy nosedived last year after its foreign exchange reserves fell to record lows, pushing the island into its worst financial crisis in more than seven decades.
However, since it secured a $2.9 billion bailout from the International Monetary Fund (IMF) in March, the island has been steadily rebuilding its reserves, strengthening the currency. Its once soaring inflation dipped to 12% year on year in June.
The median estimate in a Reuters poll is for a 200-basis-point rate cut. Seven economists called for a 200 bps reduction, three expect a 100 bps cut while one said the central bank (CBSL) could cut by 300 bps.
The decision will be announced via a statement at 7:30 a.m. (0200 GMT).
At its last meeting in June, the CBSL reduced its standing deposit facility rate and standing lending facility rate (SLFR) in a surprise move to 13% and 14%, respectively.
“Economic contraction, lower than expected inflation is giving the central bank space to cut rates. It’s the right thing to do for growth,” said Murtaza Jafferjee CEO of J.B. Securities.
The central bank expects Sri Lanka’s economy to shrink by 2% this year following a 7.8% contraction in 2022.
Sri Lanka’s domestic debt restructuring plan, which received parliamentary approval on Saturday, has pushed down domestic bond market interest rates to 12%-13% levels from 22% earlier, analysts said.
“We are waiting to see how the foreign creditors respond to debt restructuring in the next two months. That will be critical to how interest rates will play out,” said Visaahan Arumainayagam, analyst for Colombo-based broking firm Asha Securities.
The median estimate is for the SLFR to end the year at 10%, around 300 bps lower from current levels.
The island aims to complete restructuring debt talks by September in time for the first review of the IMF program.
The central bank raised rates by a record 950 basis points last year to tame inflation and by 100 bps on March 3.
For the detailed list of responses, please see below:
Organisation SDFR on July 06 SLFR on July 06 SLFR at end-2023
Acuity 12.00% 13% 10%
Advocata Institute 11.00% 12% 9%
CAL Group 11.00% 12% 10%
HSBC 13.00% 14%
First Capital 11.00% 12% 11%
Asha Securites 11.00% 12% 10%
Capital Economics 13.00% 14%
Lanka Securities 11.00% 12% 10%
University of 10.00% 11% 8%
Colombo
JB Securities 11.00% 12% 9%
Frontier Research 12.00% 13% 10%
CSE 12.00% 13%
Asia Securities 11.00% 12% 9%
Median 11.00% 12% 10%
Source: Economy - investing.com
