Sri Lanka central bank likely to raise rates on Thursday, economists say

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The Central Bank of Sri Lanka (CBSL) is expected to raise rates a second time since the onset of the pandemic on Thursday to curtail inflationary pressures, manage external challenges and attract foreign inflows, economists and analysts said.

Seven out of 12 economists polled, expect the CBSL to increase the standing deposit facility rate and the standing lending facility rate by at least 25 and a maximum of 50 basis points (bps) each on Thursday.

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The Sri Lankan central bank in a surprise move raised rates by 50 bps each in August while also increasing the statutory reserve ratio by 200 bps but kept rates unchanged in October as it shifted its focus back to economic growth.

“An increased rate would aid in combating the pressure on the rupee to depreciate as a result of the upcoming external debt repayments and increasing pressure to allow imports back in,” said Rehana Thowfeek, an independent economic analyst.

“It will also aid in mopping up excess liquidity resulting from money creation,” she added.

But several other economists said the central bank might prefer to stay on hold this week to support the nascent economic recovery with inflation still largely driven by supply.

The Colombo Consumer Price index rose to 7.6% in October from 5.7% in September, above the central bank’s 4%-6% target range.

“Next year the fiscal deficit is expected to almost entirely be financed through domestic borrowings,” said Lalinda Sugathadasa, research head at ICRA Lanka, adding that CBSL would likely keep rates on hold to keep debt service costs low.

Most analysts said a rate increase would not help address the country’s debt repayment challenge but remained important.

See below for the table of individual respondents in the poll:

OrganisationRate Hike Yes/NoBy how much? (in basis points)Reserve Ratio Change Yes/No
Colombo Stock ExchangeY25-50N
Lanka SecuritiesNNAN
Frontier ResearchY25N
Asia SecuritiesY25N
University of ColomboY50N
Asha SecuritiesY25-50N
CLSAY50N
CALNNN
ICRA LankaNNN
Advocata InstituteNNN
Rehana ThowfeekY50N
Anusha WijesingheNNN
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