CBSL’s decision to raise policy rates in line with IMF expectations

The decision by the Monetary Board of the Central Bank of Sri Lanka (CBSL) to raise policy rates is in line with International Monetary Fund (IMF) expectations, the global financial agency said.

Peter Breuer, Senior Mission Chief for Sri Lanka, and Masahiro Nozaki, Mission Chief for Sri Lanka, said the CBSL’s decision to raise the policy rate is appropriate and in line with its objectives set under the inflation targeting framework.

“It reflects CBSL’s commitment to the inflation target and is an important part of the disinflation strategy in the EFF program, which is fully committed by the Sri Lankan authorities and supported by the IMF,” they said in a joint communique.

The IMF noted that Sri Lanka’s inflation is declining but remains at a very high level, which has been disproportionally hurting the poor.

“Upside inflation risks could reverse the trend and lead to persistently high inflation which is extremely costly to the economy. Therefore, CBSL’s decision to raise the policy rate shows its commitment to reduce inflation more quickly and firmly towards the single-digit target,” the IMF said.

The IMF said that durable disinflation would help boost market confidence, reduce excessive risk premia and ease the financing conditions for the corporates, especially the small and medium enterprises, which supports recovery.

The Monetary Board of the Central Bank of Sri Lanka (CBSL) decided to raise the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 15.50 per cent and 16.50 per cent, respectively.

The CBSL and the staff of the International Monetary Fund have been engaging continuously in intensive negotiations on the monetary policy stance amidst extraordinarily high inflation and a high degree of uncertainty surrounding inflation projections and the near term outlook.

CBSL said that given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalisation of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment, which was envisaged during the initial stage of negotiations.

This decision demonstrates Sri Lanka’s commitment to the IMF-EFF arrangement, which has been pursued by the Government in order to ensure stability in the economy on multiple fronts. (Colombo Gazette)