Sri Lanka holds rates steady, sees rosy inflation, growth outlook

By Uditha Jayasinghe

COLOMBO (Reuters) -Sri Lanka's central bank kept interest rates unchanged on Friday in line with expectations, citing domestic and global uncertainties, but said inflation was likely to remain low and growth was doing better than initially expected.

The Central Bank of Sri Lanka (CBSL) kept the Standing Deposit Facility Rate at 8.25% and the Standing Lending Facility Rate at 9.25%. The decision comes in the wake of the election of a new president to steer the island out of its worst financial crisis in decades.

"The Board observed that inflation is likely to remain well below the target of 5% over the next few quarters, potentially recording deflation in the immediate future driven by changes to administratively determined prices and easing of supply conditions," CBSL said in the statement.

CBSL cut rates by 25 basis points in July as part of an easing cycle that has seen rates drop by a total 7.25 percentage points since June 2023, partially reversing the 10.50 percentage points of increases following the financial crisis.

CBSL said the latest economic indicators suggested the robust economic expansion seen in the first half of 2024 was likely to continue through the year, resulting in higher full-year growth than initially projected.

"Growth and credit growth are currently at decent levels. Given premiums have gone up on government securities due to political uncertainty, CBSL would want to see that reduction first," said Udeeshan Jonas strategy head at Colombo-based equity research firm CAL.

Jonas said inflation in the second half of the year could pick up although the fiscal easing expected to be announced by the president in the upcoming budget could impact prices.

Last Saturday, Sri Lanka elected Marxist-leaning Anura Kumara Dissanayake as president, drawn by his pledges to slash taxes, fight corruption, and reduce the cost of living.

Dissanayake dissolved parliament on Tuesday and is hoping to strengthen his hand in the 225-member house with a general election on Nov. 14. His coalition held just three seats in the parliament elected in August 2020.

On Wednesday he said he plans to begin negotiations immediately with the International Monetary Fund (IMF) to take forward the country's $2.9 billion bailout programme, which has helped cool inflation, steady the rupee and rebuild reserves.

"We are discussing the next steps for engagement" IMF Senior Mission Chief for Sri Lanka Peter Breuer said in an email late on Thursday, reiterating the fund was looking forward to working with the country's new president.

(Reporting by Uditha Jayasinghe; writing by Swati Bhat; editing by Sudipto Ganguly and Neil Fullick)