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By Uditha Jayasinghe
COLOMBO (Reuters) - Sri Lanka's central bank held its overnight policy rate steady on Wednesday to underpin a stronger economic recovery as the country gradually pulls ahead from its worst financial crisis in decades.
The decision, which leaves the key rate at pre-crisis levels, comes just days before the new government's first full-year budget due to be presented in Parliament next month.
The Central Bank of Sri Lanka (CBSL) moved to a single policy rate - the overnight policy rate which was set at 8% in November below previous benchmarks, shifting away from its dual policy rate regime of setting a Standing Deposit Facility Rate (SDFR) and a Standing Lending Facility Rate (SLFR).
The decision was largely in line with market expectations as 11 out of 13 analysts and economists polled by Reuters had predicted the monetary authority will maintain its policy stance due to benign inflation and stronger growth.
"This decision was made with a medium-term view of ensuring that inflation converges to the target of 5%, while supporting the economy to reach its potential," CBSL said in its statement.
Governor P. Nandalal Weerasinghe, addressing a post-policy press conference, said power tariffs were having a stronger impact on price pressures, beyond the control of monetary policy, but expects inflation to converge towards 5% in the third quarter of 2025.
Sri Lanka's economy crumpled under a severe foreign exchange crisis in 2022, but has made a faster-than-expected recovery after Colombo secured a $2.9 billion International Monetary Fund bailout programme in March 2023 and completed a $25 billion debt restructuring in December.
The central bank did not release official forecasts for this year, but Weerasinghe reiterated that economic growth is expected to be above 3%. That compares with Sri Lanka's forecast GDP growth of 5% in 2024, the highest in seven years, and better than initial projections. Fourth quarter and full year GDP numbers are yet to be released.
"The economy and private sector credit is growing at a good pace so the central bank does not need to be too accommodative at this point," said Udeeshan Jonas strategy head at Colombo-based equity research firm CAL.
The central bank will also keep close watch on the budget to be presented to parliament on Feb. 17, analysts said, which will be the first full-year budget under new President Anura Kumara Dissanayake after his government was elected in November.
Dissanayake, who is also the finance minister, has outlined plans to reduce income taxes, increase welfare and give relief to businesses.
However, he will have to balance fulfilling election promises with a key IMF target of posting a primary surplus of 2.3% of GDP in 2025 to remain within the four-year program.
Weerasinghe said total debt servicing in the current year will be around $2.7 billion including the bilateral debt repayments.
(Reporting by Uditha Jayasinghe, editing by Swati Bhat & Shri Navaratnam)
